What is the value of the multiplier

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Reference no: EM13901399

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

C = c0 + c11Y - T2 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:

b. 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 spend- ing on output).

c. Is the multiplier you obtained in part (c) smaller or larger than the multiplier you derived in part (a)? Explain how your answer depends on the parameters in the behavioral equa- tions for consumption, investment, and money demand.

Reference no: EM13901399

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