(Appendix 9.B) In some macroeconomic models, desired investment depends on the current level of output as well as on the real interest rate. One possible reason that desired investment may depend on output is that when current production and sales are high, firms may expect continued strong demand for their products in the future, which leads them to want to expand capacity.
Algebraically, we can allow for a link between desired investment and current output by replacing Eq. (9.B.10) with
Id = i0 - irr + iYY,
where iY is a positive number. Use this alternative equation for desired investment to derive the algebraic expressions for the general equilibrium values of employment, the real wage, output, the real interest rate, and the price level.