# Question: consider first the goods market model with constant investment c...

###### Question details

Consider first the goods market model with constant
investment:

C = c0 + c1 (Y-T)

and I, G and T are given.

(a) Solve for equilibrium output. What is the value of the
multiplier?

(b) Now, let investment depend on both sales and the interest
rate:

I = b0 + b1Y - b2i:

Solve for equilibrium output. At a given interest rate, is the
effect of change in autonomous spending bigger than what it was in
(a)? Why? (Assume c1 + b1 < 1).

(c) Next, let us introduce the financial market equilibrium
condition with real money demand equal to real money supply.

=
d1Y - d2i:

Solve for equilibrium output. (Hint: Eliminate the interest rate in
the IS equation using the expression from the LM equation.) Derive
the multiplier (the effect of a one-unit change in b0 on
output).

(d) Is the multiplier you obtained smaller or larger than the
multiplier you derived in your answer to (a)? Explain how your
answer depends on the behavioral equations for consumption,
investment and money demand.