2. Analyzing macroeconomic events with the IS curve: Consider the following changes in the macro economy....

2. Analyzing macroeconomic events with the IS curve: Consider the following changes in the macro economy. Show how these changes affect the IS curve, and explain how and why GDP is affected in the short run.

(d) The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they receive a credit that reduces the taxes they pay on corporate income.

(e) U.S. consumers develop an infatuation with all things made in New Zealand and sharply increase their imports from that country.

(f) A housing bubble bursts so that housing prices fall by 20% and new home sales drop sharply.

Solutions

Expert Solution

Aggregate demand = Consumption + Investment + Government spending + exports - Imports

Rise in aggregate demand will shift IS curve to its right and vice versa.

d) Government offers temporary investment tax credit which will reduce their net tax payable, it will induce many firms to raise their investment level. It will raise aggregate demand and shift IS curve to its right. It will result in rise in rate of interest from "i" to "i1" and output level from "Y" to "Y1".

e) As U.S. increased imports from New Zealand which will result in fall in aggregate demand and shift IS curve to its left from IS to IS1 which will reduce rate of interest from "i" to "i1" as well as output level from "Y" to "Y1".

f) Housing bubble bursts such that price fell by 20% which will raise consumption of new houses and raise aggregate demand. It will raise aggregate demand and shift IS curve to its right. It will result in rise in rate of interest from "i" to "i1" and output level from "Y" to "Y1".

Rahul Sunny answered 1 year ago

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