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Assume that the consumption function is given by C = 100 + 0.5(Y – T) and...

Assume that the consumption function is given by C = 100 + 0.5(Y – T) and the investment function is I = 1,000 – 100r, where r is measured in percent, G equals 200, and T equals 100.

a. What is the numerical formula for the IS curve? (Hint: Substitute for C, I, and G in the equation Y = C + I + G and then write an equation for Y as a function of r or r as a function of Y.) Express the equation two ways.

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 r is one percent, what is I? What is Y? If r is 3 percent, what is I? What is Y? If r is 5 percent, what is I? What is Y?

d. If G increases, does the IS curve shift upward and to the right or downward and to the left?

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