Question: In a Keynesian macroeconomic model Y = C + I + G

C = 20 + 0.75Yd

and disposable income Yd = (1 - t)Y

(a) If the values of investment and government expenditure (I and G) are exogenously fixed at 50 and 30, respectively, derive a reduced form equation for equilibrium Y in terms of t and use it to predict Y when the tax rate t is 20%.

(b) Explain what will happen to this reduced form equation and the equilibrium level of Y if G changes to 40.