THE IS-LM model

a) Assume there are no financial markets, only a good market. I, G, T are exogenous. The consumption function is linear: C = c0 + c1(Y T). Calculate the equilibrium output. What is the govenment spending multiplier?

b) Now investment is determined by the following function: I = b0+b1 Y b2 i, where te interest rate is exogenous and constant. Calculate the equilibrium output. What is the government spending multiplier? Under what condition is it meaningful? Interpret the condition. How does the multiplier compare to the one in part a)?

c) In the next step we introduce a money market: M = d1 Y d2 i, where money supply is exogenous. Calculate the equilibrium output. What is the government spending multiplier? Is it higher or lower than the one in part b)? What is your explanation for this result?