Consider the following IS-LM model:
C=c0+c1(Y-T)
I=I'
M/P=d1Y-d2i
a. Solve for equilibrium output. Illustrate the equilibrium in the ISLM diagram. What is the value of the multiplier? - Now let investment depend on both sales and the interest rate: I=b0+b1Y-b2i
b. Solve for the equilibrium output (assume c1+b1<1)
c. Derive the multiplier. Is that multiplier smaller or larger than the multiplier you derived in a)
d. Solve for the equilibrium interest rate
f. Under what conditions on the parameters of the model (c0 , c1 and so on) will investment decrease when G increases?
g. Explain the conditions you derived in part e)