Suppose that investment depends upon the interest rate as well. Assume that as the interest rate goes up investment falls due to increased borrowing costs. If the interest rate increases which of the following will happen based upon our simple goods market model?
Investment falls causing Z to increase which causes equilibrium output to fall.
Nothing changes.
Investment falls causing Z to fall which causes equilibrium output to fall.
Investment increases but consumption falls due to increased savings which has an ambiguous effect on Z and Y.