Suppose the economy is characterized by the following equations:
C =c0+c1(Y-T) 0
T =t0+t1Y 0
I =b0+b1Y 0
b1 + c1 < 1, G is fixed and there is no international trade.
Although this is an admittedly simple model, it illustrates some issues that policy mak- ers need to think about when changing fiscal policy (e.g. a reduction in the budget deficit through a reduction in government spending). Explain in words what factors will influence the equilibrium effect of a change in fiscal policy according to our model.