1. Assume that the consumption function is given by C = 200 + 0.5(Y – T)...

1. Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200.

a. What is the numerical formula for the IS curve?

b. What is the slope of the IS curve? (Hint: The slope of the IS curve is the coefficient of Y when the IS curve is written expressing r as a function of Y.)

c. If G increases to 600, what is a new IS curve?

d. Graphically illustrate IS curve from part a and new IS curve from part c.

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Expert Solution

Rahul Sunny answered 2 years ago

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