Suppose the economy is characterized by the following behavioral equations: 

C=c0 +c1YD YD = Y – T I=b0 +b1 Y

Government spending and taxes are constant. Note that investment now increases with output.

1. (1) Solve for equilibrium output.

2. (2) What is the value of the multiplier? How does the relation between investment and output affect the

   value of the multiplier? For the multiplier to be positive, what condition must (c1 + b1) satisfy?

3. (3) Suppose that the parameter b0, sometimes called business confidence, increases. How will equilibrium output be affected? Will investment change by more or less than the change in b0? Why?

   What will happen to national saving?

Answer rating: 100% (QA)

Here c0 is autonomous consumption cl is marginal propensity to consumempc YD is disposable income b0 ... View the full answer