In the following nationalincome model 865 Y CY Ii G0 0 0

In the following national-income model (8.6.5):

   Y - C(Y) - I(i) - G₀= 0 (0 < C\' < 1; I\' < 0)

   kY + L(i) - M₀= 0 (k = positive constant; L\' < 0)

   determine the response of equilibrium national income and the equilibrium    interest rate to a change in government expenditure G₀.

Can someone explain how to solve it step by step specially the total differential part

Solution

According to the equations

Y-C(Y)-I(i)-Go= ky+L(i)- M0

Y-kY=C+I+G-M0+L(i)

Y= C+I+G-M0+L(i)/ (1-k)

Hence the output and income will decline with an decrease in investment with the increase in interest rate. Government expenditure will increase and there will be more consumption with low investment.

By,

Nishant Bhatt