Consider first the goods market model with constant investment. Consumption is given by

a. Solve for equilibrium output. What is the value of the multiplier for a change in autonomous spending?
Now let investment depend on both sales and the interest rate:

b. Solve for equilibrium output. At a given interest rate, why is the effect of a change in autonomous spending bigger than what it was in part a? (Assume c₁ + b₁

c. Suppose the central bank chooses an interest rate of I̅.

Solve for equilibrium output at that interest rate.

d. Draw the equilibrium of this economy using an IS-LM diagram.

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C coc(YT) and I, G, and T are given.