Consider first the goods market model with constant investment. Consumption is given by a. Solve for equilibrium
Question:
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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