IS-LM Blanchard problem

[phelps.phan]

C=c0+c1(Y-T)
I=b0+b1Y-b2i
M/P=d1Y-d2i
Under what conditions on the parameters of the model will investment increase when G decreases? Assume c1+b1<1.
How do we find dI/dG??

[kangkan]

you can use the implicit function theorem...refer to chiang chapter 8...

[kangkan]

or you can try to express I as a function of G....then take derivitive

[Arushi1]

First find the equilibrium Y and substitute that in the Investment function. And then differentiate it wrt G.

[phelps.phan]

hey kangkan, thanks a lot..but if we do implicit differenciation, it will be with respect to Y right, how will we get an expression of dI/dG. Could you pls explain the working. I'm a little stuck here.

@Arushi if we find equilibrium Y and put it in Investment function, what about interest rate? Should we substitute for interest rate too?