Two equation model. The first equation is an identity, that is it is true by definition and the second is the Keynesian consumption function. In this model the variables Y and C are endogenous, the variable I is exogenous, and the coefficients a and b are known. The subscript t indicates the time period. Currently most econometric models are quarterly.
C t is a flow variable.
If the time periods were quarters it measures the amount of consumption which would occur in a year if the level which occurred in the particular quarter occurred all year. The first equation is a dynamic version of the GNP identity. The second equation is a much simplified equation representing the fact there is a lag from the time people earn their income and the time they spend it. What this model is used for is to indicate the time path which results from a shift in the level of investment. I t equal to I 0 .