Keynesian Economics Question?
I have a question about the income-expenditure model. For the consumption function, you have:
C = Caut + MPC(Y + TR - T), where Y = disposable income, TR = transfer payments, and T = taxes
But when finding the equilibrium national income (real GDP), do you have to do:
(a) Y* = (1/(1-MPC)) x A (where A = Caut + I + G + NX), or
(b) Y* + TR - T = 1/(1-MPC)) x A?
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Verified answer
It should be
Y*=1/1-MPC x I,G,NX,TR,T
Caut is a constant term,in partial analysis,it will be gone by derivative.
If it is in a case of closed economy, NX should be cut off.
I,G,TR,T are instrumental variables which will cause the multiplier effects.