Macroeconomics Theory 1

ECO – 2201
Instructor – Piyali Banerjee
Monsoon, 2023
Chapter 1: The Demand Side

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This chapter focuses on the demand side of macroeconomics. Typically, this
chapter discusses the spending decisions of the economy (aggregate demand)
and how they influence the level of economic activity. At the end of this
chapter, you will learn:

• What forms the demand side of the closed economy

• The goods market equilibrium and the multiplier effect
• The IS curve and its properties
• Drivers of the components of demand

Question: In late 2000s, households and firms across the world cut back their
spending, and the global economy went into a recession. Why?

Note that there are three stages of the business cycle:

1. Normal – when the country’s output is growing normally (2% - 3% per

year).
2. Boom – when a country’s output is growing excessively.
3. Recession – when the country’s output is falling ⇒ high rate of
unemployment ⇒ low aggregate income of the country.

• Housing market boom during the early and mid-2000s in the U.S.
economy.
• More availability of housing loans from banks without proper mortgage
securities.
• Loan default by some house owners.
• Bankruptcy ⇒ less availability of money in the economy ⇒ less spending
on goods and services by households ⇒ more unsold goods ⇒ less
output is produced ⇒ recession.

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 Real GDP Growth Rate in India from 1980 to 2028
12.00

10.00

8.00

6.00
RGDP Growth Rate

4.00

2.00

0.00
1970 1980 1990 2000 2010 2020 2030 2040
-2.00

-4.00

-6.00

-8.00
Year

Real GDP Growth Rate in the USA from 1980 to 2028

8

4
RGDP Growth Rate

0
1970 1980 1990 2000 2010 2020 2030 2040

-2

-4
Year

3
 Real GDP Rate from 1980 to 2028
12

10

6
RGDP Growth Rate

0
1970 1980 1990 2000 2010 2020 2030 2040
-2

-4

-6

-8
Year

India United States Advanced economies Emerging market and developing economies World

Data Source: International Monetary Fund

(https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD/I
ND/USA)

Example:

Balance Sheet of a Simple Bank

Asset Liability
Reserves (20%) – Rs. 20,000 Deposits – Rs. 60,000
Loans (70%) – Rs. 70,000 Debt – Rs. 30,000
Securities (10%) – Rs. 10,000 Bank owner’s capital/ Shareholder’s
equity – Rs. 10,000
Total – Rs. 100,000 Total – Rs. 100,000

Suppose 20% of loan takers default on their loans.

Now bank gets return = Rs. 70,000 – (70,000 × 0.20) = Rs. 56,000

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 New Balance Sheet of a Simple Bank

Asset Liability
Reserve (20%) – Rs. 20,000 Deposit – Rs. 60,000
Loans (70%) – Rs. 56,000 Debt – Rs. 26,000
Securities (10%) – Rs. 10,000 Bank owner’s capital/ Shareholder’s
equity – Rs. 0
Total – Rs. 86,000 Total – Rs. 86,000

For loan default, the total availability of money in the economy goes down.
Moreover, shareholders of the bank get back nothing. Even the bank is unable
to pay back some of its debt holders and the bank defaults. Economy’s
investment falls, production falls and unemployment rises ⇒ recession.

Question: Why sometimes boom is not good for the economy?

1. Aggregate Demand (AD) and Gross Domestic Product

(GDP)

• Definition of Aggregate Demand (AD): AD is the real expenditure on

goods and services which are produced in the economy.
• The Demand side captures the spending decisions of:
o Households: Domestic & Foreign (Open Economy)
o Firms
o The Government
Aggregate Demand (AD): 𝑦𝑦 𝐷𝐷 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺 + (𝑋𝑋 − 𝑀𝑀)

Question: Why study this?

• Fluctuations in AD affect unemployment and inflation

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  More AD ⇒ more output produced in the economy ⇒
unemployment ↓ ⇒ aggregate income of the economy ↑ ⇒ more
spending on goods and services ⇒ aggregate price level of the
country ↑ (inflation).

 Less AD ⇒ less output produced in the economy ⇒

unemployment ↑ ⇒ aggregate income of the economy ↓ ⇒ less
spending on goods and services ⇒ aggregate price level of the
country ↓ (deflation).

Question: What is the difference between disinflation and deflation?

• Relevance to monetary and fiscal policy makers

 Policy makers stabilize the fluctuations in AD since they affect
unemployment and inflation.

 Monetary policy – policy adopted by Central Bank to stabilize

AD fluctuations, e.g. to combat recession, CB reduces the
interest rate.

 Fiscal policy – government’s decision about the government

spending and tax. To stabilize the AD, government alters its
spending and tax decision, e.g. to prevent the recessionary
effect, government either increases its spending or reduces the
tax burden from consumers to generate AD.

• Understand the transmission mechanism of monetary and fiscal

policy

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Recall the concept of Gross Domestic Product (GDP):

• Definition of GDP - Gross domestic product (GDP) is the market value

of all final goods and services produced within an economy in a given
period of time.

• Three methods of computing GDP:

1. Expenditure Method –
𝑦𝑦 𝐷𝐷 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺 + (𝑋𝑋 − 𝑀𝑀) ← 𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
Proof:

where, C is consumption - the value of all goods and services bought by

households. Includes:
a. Durable goods - last a long time. E.g., cars, home appliances
b. Nondurable goods - last a short time. E.g., food, clothing
c. Services - are intangible items purchased by consumers. E.g., dry
cleaning, air travel.

I is investment - spending on capital, a physical asset used in future

production. Includes:
a. Business fixed investment - Spending on plant and equipment
b. Residential fixed investment - Spending by consumers and
landlords on housing units
c. Inventory investment - The change in the value of all firms’
inventories.

G is government spending - G includes all government spending on

goods and services. G excludes transfer payments (e.g., unemployment
insurance payments) because they do not represent spending on goods
and services.

(X – M) is the net exports – i.e. (exports – imports)

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 a. Exports: the value of goods & services sold to other countries
b. Imports: the value of goods & services purchased from other
countries

Hence, (X – M) equals net spending from abroad on our goods & services.

2. Value Added Method –

𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔

Exercise 1 - Identifying value added:

• A farmer grows a bushel of wheat and sells it to a miller for $1.00.

• The miller turns the wheat into flour and sells it to a baker for $3.00.

• The baker uses the flour to make a loaf of bread and sells it to an
engineer for $6.00.

 The engineer eats the bread.

Compute value added at each stage of production and GDP.

• Lessons of this problem:

1. GDP = value of final goods = sum of value at all stages of production

2. We don’t include the value of intermediate goods in GDP because their

value is already embodied in the value of the final goods.

Answer: Each person’s value added (VA) equals the value of what he/she
produced minus the value of the intermediate inputs he/she started with.

Farmer’s VA = $1

Miller’s VA = $2

Baker’s VA = $3

GDP = $6

In-class Exercise 1. Suppose a farmer is growing oranges and sells them to

a juice making company at Rs. 300. The juice factory extracts the juice and

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distributes to the wholesale sore at Rs. 500. The wholesale store sells the
orange juice to the retail store for Rs. 800. Compute the GDP.

3. Income Method –
𝐺𝐺𝐺𝐺𝐺𝐺 = 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 + 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑡𝑡ℎ𝑒𝑒 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

Rules of Computing GDP:

Rule 1. Income method ≡ Expenditure method.

Question: Why?? ← Because every transaction has a buyer and a seller.

These two quantities are equal because all spending that is channeled to firms
to pay for purchases of domestically produced final goods and services is
revenue for firms. Those revenues must be paid out by firms to their factors
of production in the form of wages, profit, interest, and rent.

Question: Why does the income and expenditure method give the same GDP
when households save?

Hint: Think about the potential buyer and seller of savings!

Rule 2: Used goods – The sale of used goods is not included as a part of GDP.

e.g. If I pay Rs.30,000 for a used computer for my business, then I’m
doing 30,000 of investment, but the person who sold it to me is doing
30,000 of disinvestment, so there is no net impact on aggregate
investment and GDP.

Rule 3: The housing issue

• A consumer’s spending on a new house counts under investment, not

consumption.
• A tenant’s spending on rent counts under services—rent is considered
spending on “housing services.”
• So, what happens if a renter buys the house she had been renting?
Conceptually, consumption should remain unchanged: Just because

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 she is no longer paying rent, she is still consuming the same housing
services as before.
• In computing GDP, (the services category of) consumption includes the
imputed rental value of owner-occupied housing.

Rule 4. The treatment of inventories - When a firm increases its inventory of

goods, this investment in inventory is counted as an expenditure by the firm
owners. Thus, production for inventory increases GDP just as much as it does
production for final sale.

Exercise 2 - Suppose a firm:

• produces Rs.10 million worth of final goods

• only sells Rs.9 million worth
• Does this violate the expenditure = output identity?
Answer

• When firms sell fewer units than planned, the unsold units go into
inventory and are counted as inventory investment.
• This explains why “output = expenditure”—the value of unsold output
is counted under inventory investment, just as if the firm “purchased”
its own output.

Note: Remember, the definition of investment is goods bought for future use.
With inventory investment that future use is to give the firm the ability in the
future to sell more than its output.

Note: Measurement error in computing GDP occurs due to tax evasion or existence
of black market. Hence, expenditure method and income method give different
numbers of GDP.

2. A Closed Economy and IS (Investment-Savings) Curve

• Closed economy ⇒ No foreign transaction i.e. 𝑋𝑋 − 𝑀𝑀 = 0

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 • 𝐺𝐺𝐺𝐺𝐺𝐺: 𝑦𝑦 𝐷𝐷 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺
• The IS-curve is investment-savings curve that represents the aggregate
demand.
• Definition of IS-curve: The IS-curve shows combinations of the real
interest rate (r) and output (y) under goods market equilibrium.

Consumption of U.S. Govt spending of U.S

10000.000 8000.000
8000.000
USD in Billion

6000.000
USD in Billion

6000.000
4000.000
4000.000
2000.000
2000.000
0.000 0.000
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002

Year Year

Investment of U.S
3000.000
2500.000
USD in Billion

2000.000
1500.000
1000.000
500.000
0.000
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002

Year

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Question: Investment is more volatile than consumption, government
spending and GDP itself. Why?
Fact: Investment is negatively related with the real interest rate. Government
and the policy makers alter the real interest rate to modify the investment in
order to prevent the fluctuations in aggregate demand (AD) through the goods
market equilibrium and the IS-curve.

Assumptions:
1. Firms are willing to meet higher demand for their goods and services.
2. Workers are willing to take extra job or work for extra hours that are offered.
(1) + (2) ⇒ Supply of output adjusts to meet the demand for goods, services
and labors.

3. The Model of Goods Market Equilibrium (closed

economy) and Keynesian Cross
• The goods market equilibrium is defined as:
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 (𝑦𝑦) = 𝑃𝑃𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 (𝑦𝑦 𝐷𝐷 )
𝑤𝑤ℎ𝑒𝑒𝑒𝑒𝑒𝑒, 𝑦𝑦 𝐷𝐷 = 𝐶𝐶 + 𝐼𝐼 + 𝐺𝐺

• First assume a Keynesian consumption function:

𝐶𝐶 = 𝑐𝑐0 + 𝑐𝑐1 (1 − 𝑡𝑡)𝑦𝑦

where 𝑐𝑐0 : autonomous consumption, not affected by income

t : tax rate
y : income
(1 − 𝑡𝑡) 𝑦𝑦 : disposable income, 𝑦𝑦 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
∆𝐶𝐶
𝑐𝑐1 : marginal propensity to consume (MPC) and 𝑀𝑀𝑀𝑀𝑀𝑀 = ∆𝑦𝑦 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑

Question: 0 ≤ 𝑀𝑀𝑀𝑀𝑀𝑀 (𝑐𝑐1 ) ≤ 1, 𝑤𝑤ℎ𝑦𝑦? ?

• So, the AD is given by: 𝑦𝑦 𝐷𝐷 = 𝑐𝑐0 + 𝑐𝑐1 (1 − 𝑡𝑡)𝑦𝑦 + 𝐼𝐼 + 𝐺𝐺 ← (1)

• Goods market equilibrium is given by 450 line, representing 𝑦𝑦 = 𝑦𝑦 𝐷𝐷 ;
where 𝐴𝐴𝐴𝐴 = 𝑦𝑦.
• At equilibrium:

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𝑦𝑦 = 𝑐𝑐0 + 𝑐𝑐1 (1 − 𝑡𝑡)𝑦𝑦 + 𝐼𝐼 + 𝐺𝐺 ← (2) ← 𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾𝐾 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝒄𝒄𝟎𝟎 +𝑰𝑰+𝑮𝑮
𝑖𝑖. 𝑒𝑒. 𝒚𝒚 = ← (3) ← 𝑇𝑇ℎ𝑒𝑒 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑜𝑜𝑜𝑜 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜.
𝟏𝟏− 𝒄𝒄𝟏𝟏 (𝟏𝟏−𝒕𝒕)

Figure 1. Good’s Market Equilibrium

In-class Exercise 2: Suppose autonomous consumption in the year 2018

is Rs. 900 billion in India, with marginal propensity to consume (MPC) is
0.5 and tax rate is 0.2. In this year, the investment on capital goods in Rs.
300 billion and government spending is Rs. 600 billion. Find the
equilibrium output of the country.

3.1: The Multiplier:

1. The government purchase multiplier: Suppose government increases its
expenditure (𝐺𝐺 ↑) and the increase in G is denoted by ∆𝐺𝐺. Then in figure 1,
the planned output curve (𝑦𝑦 𝐷𝐷 ) shifts upward without changing the slope.
As a result, equilibrium output (y) will increase by,
1
∆𝑦𝑦 = 1− 𝑐𝑐1 (1−𝑡𝑡)
∆𝐺𝐺 (Taking derivative of equation 3 with respect to G )
1
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆, 1− 𝑐𝑐 = 𝑘𝑘, 𝑡𝑡ℎ𝑒𝑒𝑒𝑒 ∆𝑦𝑦 = 𝑘𝑘∆𝐺𝐺
1 (1−𝑡𝑡)

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• The multiplier is greater than 1 since 0 ≤ 𝑐𝑐1 ≤ 1 and 0 ≤ 𝑡𝑡 ≤ 1.

Figure 2. Keynesian Cross – Increase in Government Spending

2. The autonomous consumption and investment multipliers:

 An increase in autonomous consumption, 𝑐𝑐0 will shift the planned
output curve upward and the equilibrium output would increase by:
1
∆𝑦𝑦 = 1− 𝑐𝑐1 (1−𝑡𝑡)
∆𝑐𝑐0 (Taking derivative of equation 3 with respect to 𝑐𝑐0 )
1
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆, 1− 𝑐𝑐 = 𝑘𝑘, 𝑡𝑡ℎ𝑒𝑒𝑒𝑒 ∆𝑦𝑦 = 𝑘𝑘∆𝑐𝑐0
1 (1−𝑡𝑡)

 An increase in investment, I will shift the planned output curve

upward and the equilibrium output would increase by:
1
∆𝑦𝑦 = 1− 𝑐𝑐1 (1−𝑡𝑡)
∆𝐼𝐼 (Taking derivative of equation 3 with respect to I )
1
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆, 1− 𝑐𝑐 = 𝑘𝑘, 𝑡𝑡ℎ𝑒𝑒𝑒𝑒 ∆𝑦𝑦 = 𝑘𝑘∆𝐼𝐼
1 (1−𝑡𝑡)

3.2: The Paradox of Thrift in Keynesian Cross Model:

• The equilibrium in good’s market:
𝑦𝑦 = 𝑐𝑐0 + 𝑐𝑐1 (1 − 𝑡𝑡)𝑦𝑦 + 𝐼𝐼 + 𝐺𝐺
𝑦𝑦 − 𝑐𝑐0 − 𝑐𝑐1 (1 − 𝑡𝑡)𝑦𝑦 − 𝐺𝐺 = 𝐼𝐼

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 Subtracting and adding tax (T) in the above equation
{𝑦𝑦 − 𝑐𝑐0 − 𝑐𝑐1 (1 − 𝑡𝑡)𝑦𝑦 − 𝑇𝑇} + {𝑇𝑇 − 𝐺𝐺} = 𝐼𝐼

{𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 − 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝑇𝑇𝑇𝑇𝑇𝑇} + {𝑇𝑇𝑇𝑇𝑇𝑇 − 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺. 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆} = 𝐼𝐼

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 + 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 𝐼𝐼

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 𝐼𝐼 ⇒ 𝑺𝑺 = 𝑰𝑰

Question: Should savings be encouraged or discouraged in a recession?

• ↑ Savings  ↑ Investment in capital stock  ↑ AD

• But ↑ Savings  ↓ Consumption  ↓ AD
• In our model I and G are exogenous from 𝑺𝑺 = 𝑰𝑰 identity.
• A rise in savings is modelled by a fall in c0 to c0 ′.
• Since I and G are fixed, y must fall for the equation above to hold.
• Paradox of Thrift: Higher savings causes output to fall.
• Model-specific result: No mechanism for high savings to translate
into higher investment.

4. Deriving IS-curve from Keynesian Cross

• Fisher Equation: 𝑟𝑟 = 𝑖𝑖 − 𝜋𝜋 𝐸𝐸

• Assume that Consumption is independent of r, while investment is

given by: 𝐼𝐼 = 𝑎𝑎0 − 𝑎𝑎1 𝑟𝑟

• Substituting this into the AD identity (3), we get the IS relation:

1
𝑦𝑦 = [𝑐𝑐 + (𝑎𝑎0 − 𝑎𝑎1 𝑟𝑟) + 𝐺𝐺]
1 − 𝑐𝑐1 (1 − 𝑡𝑡) 0

𝑦𝑦 = 𝑘𝑘 [𝑐𝑐0 + (𝑎𝑎0 − 𝑎𝑎1 𝑟𝑟) + 𝐺𝐺]

𝑦𝑦 = 𝑘𝑘 [𝑐𝑐0 + 𝑎𝑎0 + 𝐺𝐺] − 𝑘𝑘𝑎𝑎1 𝑟𝑟

• The larger the multiplier (k), or the larger the interest-sensitivity of

investment (𝑎𝑎1 ), the larger the effect of r on y (IS curve is flatter).

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 In the r-y space, plot the Investment
function.

Then add in 𝑐𝑐0 and 𝐺𝐺.

Finally, factor in the multiplier to get

the IS Curve.

Figure 3. Deriving the IS-curve

4.1. The Properties of IS-curve

• Downward sloping
 Low r  ↑ Investment  ↑ Output

• IS curve slope
 Changes with multiplier, k and hence c1 and 𝑡𝑡.

 Changes with 𝑎𝑎1 .

• Shifts in the IS Curve:

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  When autonomous consumption c0 , autonomous investment a0 ,
or government spending G change.

 When the multiplier changes.

Exercise 3:

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