Question

Consider a closed economy that is described by the following functions: C = 20 + 0.5Y...

Consider a closed economy that is described by the following functions:

C = 20 + 0.5Y D

T x = 10

T r = 40

I = 100 ? 10 · i

G = 40

where i is the interest rate in the economy.

Q1. Suppose originally i = 1. Find equilibrium output. Illustrate on the Keynesian cross diagram.

Q2.Suppose now the interest rate increases to i = 2. Find new equilibrium output. Illustrate the change on the Keynesian cross diagram.

Q3.Suppose now the interest rate increases to i = 5. Find new equilibrium output. Illustrate the change on the Keynesian cross diagram.

Q4. Depict combinations of interest rates and output you found in Q1-Q3 in (Y, i) coordinates. Connect the dots and obtain the IS curve. Explain how the IS curve is related to the goods market.

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