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# 4. Assume that G and T are exogenous, and C is determined by the standard. consumption function, but that investment is now endogenous and

## 4. Assume that G and T are exogenous, and C is determined by the standard. consumption function, but that investment is now endogenous and responds to income: I = b + bY. Assume c + b < 1. (a) Calculate equilibrium output, state the multiplier, and compare it to the simple model with exogenous G, T and I. (b) Using the expression for equilibrium output, derive the marginal effect of a change in the propensity to invest (b), and the propensity to consume (c). (c) Now assume that the propensity to save (i.e. s = 1-c) increases. What happens to equilibrium output, investment, consumption and private, public and national savings? Briefly explain and discuss. int: In (b) you must calculate two partial derivatives:- and For you will need to use the product rule as you'll have c both in the multiplier and in the autonomous spending. If Y = XZ Y'X'ZZ'X or, dy = 0xdX + odz

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Lets break down the problem step by step Part A Equilibrium Output and Multiplier We have the consumption function C c0 bYd where Yd is endogenous inc...### Get Instant Access to Expert-Tailored Solutions

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