Question: Consider first the goods market model with (exogenously given) constant investment. Consumption is given by I. Consider first the goods market model with (exogenously given)

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

I. Consider first the goods market model with (exogenously given) constant investment. Consumption is given by C = Co + C (Y-T) and I, G, and T are given. a. Solve for equilibrium output. What is the value of the multiplier? Now let investment depend on both sales and the interest rate: 1 = b + bY -bi b. Solve for equilibrium output. At a given interest rate, is the effect of a change in autonomous spending bigger than what is was in part (a)? Why? (Assume c + b < 1.) Next, write the LM relation as M/P = dY-di c. Solve for equilibrium output. (Hint: Eliminate the interest rate from the IS and LM relations.) Derive the multiplier (the effect of a change of one unit in autonomous spending on output).

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