A simple Keynesian income determination model of an open economy is described by the following equation
AE = C + I + G + X - M, where
C = C + bYd
Yd = Y - T
T = T + tY
I = I
G = G
X = X
M = mY
(a) Derive, from first principles, the equilibrium level of income. Sketch the equilibrium position using a well-labelled Keynesian cross diagram.
(b) Explain the Keynesian expenditure multiplier. Derive the formula for the multiplier in this model.