Question

**The IS Curve**: Assume that the consumption
function is given by *C*= 2000 + 0.6(*Y*– *T*)
and the investment function is *I*= 4,000 – 200*r*,
where *r* is measured in percent, *G* equals 3000,
and *T* equals 2000.

a) |
What is the numerical formula for the |

b) |
What is the slope of the |

c) |
If |

Answer #1

a) Y = C + I + G

Substituting the values of C, I, T and G in the above equation,

Y = 2000 + 0.6(Y - T) + 4000 - 200r + 3000

Y = 9000 - 200r + 0.6(Y - 2000)

Y = 9000 - 200r + 0.6Y - 1200

Y - 0.6Y = 7800 - 200r

0.4Y = 7800 - 200r

200r = 7800 - 0.4Y

r = (7800 - 0.4Y) / 200

**r = 39 - 0.02Y is the answer**

**0.4Y = 7800 - 200r**

**Y = (****7800 - 200r) / 0.4**

**Y = 19,500 - 500r is the answer.**

b) The slope of the IS curve is -0.02 as can be seen from the equation solved above.

c) **r =** **1% or 0.01**

I = 4000 - 200r = 4000 - 200(0.01) = 4000 - 2 = 3998 is the answer.

Y = 19,500 - 500(0.01) = 19,500 - 5 = 19,495 is the answer.

**r = 3% or 0.03**

I = 4000 - 200r = 4000 - 200(0.03) = 4000 - 6 = 3994 is the answer.

Y = 19,500 - 500(0.03) = 19,500 - 15 = 19, 485 is the answer.

**r = 5% or 0.05**

I = 4000 - 200r = 4000 - 200(0.05) = 4000 - 10 = 3990 is the answer.

Y = 19,500 - 500(0.05) = 19,500 - 25 = 19, 475 is the answer.

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