Assuming that there is no government spending or trade, an economy’s aggregate demand is given by its domestic consumption C and investment I, AD = C + I = c0 + c1Y + I. In the economy’s goods market equilibrium this equals its output: AD = Y.
a) What is C1 and how its impact on output if the economy has a higher share of credit-constrained households? (20 marks)
b) Please calculate the multiplier in this economy. (15 marks)
c) If c1 = 0.33, then a £1 million increase in investment leads to how much increase in output, ceteris paribus? (15 marks)