Find

(a) the reduced form,

(b) the value of the equilibrium level of income Ye, and

(c) the effect on the multiplier, given the following model in which investment is not autonomous but a function of income:

and C0 = 65, I0 = 70, b = 0.6, and a = 0.2.

(c) When investment is a function of income, and not autonomous, the multiplier changes from 1/(1 –

b) to 1/(1 – b – a). This increases the value of the multiplier because it reduces the denominator of the fraction and makes the quotient larger, as substitution of the values of the parameters in the problem shows

Transcribed Image Text:

Y = C +1 C = Co+by 1 = 10 +aY