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Investment, I, is financed by bank loans and is defined as (2) I=I(i¹ - π), where it is the loan rate, ne expected inflation, and I' < 0.
Household consumption, C, depends on factor income, interest rates, and wealth: (6) C=C₁Y³-c2[(iD - π) + (iW - π)] + c3(FH/PD), where 0 <c₁ < 1; C2, C3 > 0; and Fo is the beginning-of-period stock of household financial wealth.
The interest rate on domestic deposits is (8) iD=iR, where it is the cost of borrowing from the central bank, or the refinance rate.
(11) (1-x)Ys=(1-8)C+I+G, where 0<x< 1 is the fraction of domestic output that is exported (assumed fixed), 0<8< 1 is the fixed fraction of total household consumption expenditure allocated to imported goods, and G is government spending.
Question 5 a) By using the formulas (1), (2), (6), (8) and (11), and setting [²0], please derive the goods market equilibrium condition of the model, in terms of il as a function GG(PD, ¡R, G). What is the restriction needed on x,6, and c1 to ensure that the net supply effect is positive? [7 Points] b) Explain intuitively the signs of the partial derivatives of the function GG? [4 Points]