So far we have assumed that consumption is determined by disposable income (C = C(Y ?T), with the function increasing) and investment is determined by the real interest rate (I = I(r), with the function decreasing).

Question 1 So far we have assumed that consumption is determined by disposable income (0 = C (Y T), with the function increasing) and investment is determined by the real interest rate (I = 1(1"), with the function decreasing). But the real interlst rate may affect households' choice between consumption and saving, and rms' sales or cash ow may inuence their investment. This problem therefore asks you to consider the implications of some alternative assumptions. a. Suppose C = C(Y T, r), with C a decreasing function of 1". With this change in the model, does an increase in G increase 0, decrease it, or leave it unchanged, or is it not possible to tell? b. Suppose I = I (Y T, r), with I an increasing function of Y T (and suppose that C is given by C(Y T)). Does an increase in G increase I , decrease it, leave it unchanged, or is it not possible to tell? 0. Suppose there are two types of investment. One (for example, the investment of large, mature rm) is determined by the real interest rate, and the other (for example, the investment of start-ups) is determined by consumer demand. Thus we write I = Flor) + 130/ T) where I A and I B are the two types of investment. Similarly, assume 0 = 0%) + 030; T) The rst type of consumption may include cars and other long-lived goods, and the second might include shorter-lived goods such as restaurant meals and vacations. The \"A\" functions are assumed to be decreasing, the \"B\" functions are assumed to be increasing. With this change in the model, how does an increase in G affect each type of investment and each type of consumption