Consider an economy in which the price level does not change over time and so the real interest rate is equal to the nominal interest rate. The demand for goods is given by:

Z = a₀+ a₁Y - a₂i

while the demand for real money balances is given by:

(M/P)^d= b₁Y - b₂i.

The supply of real money balances is given by M*.

The parameters of the model, (a₀, a₁, a₂, b₁, b₂, M*), are all assumed to be positive.

(b)Suppose the government increases its spending by 1. Which of the parameters of the model, (a₀, a₁, a₂, b₁, b₂, M*), will change and why?