Suppose the economy is closed and is characterized by the following behavioral equations: C=C₁ +c₁YD Y₂ = Y-T I=b₁ + b₁Y a. (5) Government spending and taxes are constant. Solve for the equilibrium output. What is the value of the multiplier? How does the relationship between investment and output affect the value of the multiplier as compared to the case when investment was exogenous? For the multiplier to be positive what condition must (c, +b,) satisfy? Explain your answers? b. (5) Suppose that the parameter bo, sometimes called business confidence, increases. How will the equilibrium output be affected? Will investment change by more or less than the change in bo? Why? What will happen to national saving?
