Suppose the economy is characterized by the following behavioral equations:

C=C0+C1YD

YD=Y-T

1=b0+b1Y

Government spending and taxes are constant. Investment now increases with output. Solve for the equilibrium output.

B. What is the value of the multiplier? How does teh relations between investment and output affect the value of the multiplier. For the mulitpler to be postivie what condition must (c1+b1) satisfy? Explain

What would happen if (c1+b1)>1?

Suppose that the parameter b0 sometimes called business confidence increases. How will equilibrium output be affected? Will investment change by more or less than the change in b0. Why? What will happen to national saving?