9. Investment and income This problem examines the implications of allowing investment to depend on output. Chapter 5 carries this analysis much further and introduces an essential relation-the effect of the interest rate on investment-not examined in this problem. a. Suppose the economy is characterized by the following behavioral equations: C=C₁ + C₁YD YD=Y-T 1= b+b₁Y Government spending and taxes are constant. Note that investment now increases with output. (Chapter 5 discusses the reasons for this relation.) Solve for equilibrium output. b. What is the value of the multiplier? How does the relation between investment and output affect the value of the multiplier? For the multiplier to be positive, what condition must (c₁ + b₁) satisfy? Explain your answers. c. What would happen if (c + b₁)>rl? (Trick question. Think about what happens in each round of spending).

Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter17: Capital And Time
Section: Chapter Questions
Problem 17.8P
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9. Investment and income
This problem examines the implications of allowing investment to depend on output. Chapter 5
carries this analysis much further and introduces an essential relation-the effect of the interest
rate on investment-not examined in this problem.
a. Suppose the economy is characterized by the following behavioral equations:
C=C₁ + C₁YD
YD=Y-T
1= b+b₁Y
Government spending and taxes are constant. Note that investment now increases with output.
(Chapter 5 discusses the reasons for this relation.) Solve for equilibrium output.
b. What is the value of the multiplier? How does the relation between investment and output
affect the value of the multiplier? For the multiplier to be positive, what condition must (c₁ + b₁)
satisfy? Explain your answers.
c. What would happen if (c + b₁)>rl? (Trick question. Think about what happens in each
round of spending).
Transcribed Image Text:9. Investment and income This problem examines the implications of allowing investment to depend on output. Chapter 5 carries this analysis much further and introduces an essential relation-the effect of the interest rate on investment-not examined in this problem. a. Suppose the economy is characterized by the following behavioral equations: C=C₁ + C₁YD YD=Y-T 1= b+b₁Y Government spending and taxes are constant. Note that investment now increases with output. (Chapter 5 discusses the reasons for this relation.) Solve for equilibrium output. b. What is the value of the multiplier? How does the relation between investment and output affect the value of the multiplier? For the multiplier to be positive, what condition must (c₁ + b₁) satisfy? Explain your answers. c. What would happen if (c + b₁)>rl? (Trick question. Think about what happens in each round of spending).
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