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Suppose that desired consumption and desired investment are given as: C = c1 + cY (Y...

Suppose that desired consumption and desired investment are given as: C = c1 + cY (Y − T) − crr I = i1− irr G = G0 T = τ1 + τY (a) Derive the equation for IS curve and draw its graph assuming c1 = 200 cY = 0.8 cr = 500 i1 = 200 ir = 500 G = 196 τ1 = 20 τ = 0.25 (b) What would happen to the IS curve when lump-sum taxes, τ1, increases? (c) What would happen to the IS curve when income tax, τ, increases? (d) The parliament passes a new law requiring balanced budget, that is G = T. How would this new law affect the IS curve?

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