Question

Assume that the consumption function is given by *C* =
200 + 0.5(*Y* – *T*) and the investment function is
*I* = 1,000 – 200*r*, where *r* is measured in
percent, *G* equals 300, and *T* equals 200.

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* decreases, does the *IS* curve shift
upward and to the right or downward and to the left?

Answer #1

Assume the following model of the economy, with the price level
fixed at 1.0:
C = 0.8(Y – T)
T = 1,000
I = 800 – 20r
G = 1,000
Y = C + I + G
Ms/P =
Md/P = 0.4Y –
40r
Ms = 1,200
A. Write a numerical formula for the IS curve, showing
Y as a function of r alone. (Hint:
Substitute out C, I, G, and
T.)
B. Write a numerical formula for the LM...

Assume the following model of the economy, with the price level
fixed at 1.0:
C = 0.6(Y – T)
T = 40
I = 120 – 30r
G = 40
Y = C + I + G
Ms/P = Md/P = 2Y – 50r
Ms = 280
Write a numerical formula for the IS curve, showing Y as a
function of r alone. (Hint: Substitute out C, I, G, and T.)
Write a numerical formula for the LM curve, showing...

In the Keynesian Cross, assume that the consumption function is
given by: C = 200 + 0.8 (Y-T).
Assume that: I = I ̅= 100, G = G̅ =100, T = T̅ =100.
a) Use graphical analysis to demonstrate the determination of
equilibrium income.
b) What is the equilibrium level of income?
c) If government spending increase to 125, what is the new
equilibrium income?
d) Now instead of assuming T = T̅ , assume that T = T̅ +...

1) If the consumption function is given by C = 500 + 0.5( Y –
T), and Y is 8,000 and T is given by T = 200 + 0.2 Y, then C
equals: A. 2,400. B. 2,800. C. 3,600. D. 4,200.
2) The real interest rate is the: A. nominal interest rate
corrected for the rate of inflation. B. rate of interest actually
paid by banks. C. rate of inflation minus the nominal interest
rate. D. rate of interest...

Assume that the consumption function is given by C = 200 +
0.75(Y ? T). Government purchases and taxes are both 100. Planned
investment is derived as follows: there are many ideas, whose cost
of implementation are all 3. Ideas are indexed by j > 0. Idea j
produces j units of return next year. Index j follows an
exponential distribution on (0, ?) with density 100e ?j , j > 0.
Derive the IS curve.

Suppose that economy of Portugal is characterized by the
following C = 200 + 0.5 (Y - T) Represents the consumption function
I = 600 – 30 r represents the investment function G = 300
represents the public spending T = 300 represents the level of
taxation (m/p)d = y - 40 r represents the money demand function
(m/p)s = 1500 r represents the real money supply d Y represents the
global output Find the IS curve the LM curve...

Equilibrium Values and Saving
Assume that GDP (Y) is 5,000. Consumption (C) is given by the
equation C = 1,000 + 0.3(Y – T). Investment (I) is given by the
equation I = 1,500 – 50r, where r is the real interest rate in
percent. Taxes (T) are 1,000. Government spending (G) is 1,500.
What are the equilibrium values of C, I, and r?
What are the values of private saving, public saving, and
national saving?
Now assume there is...

1. Suppose an economy is described by the consumption function
C=1,100+.8(Y-T), I= 2,000-200r, T=1,000, G=1,300, Y=15,000. What is
the equilibrium real interest rate? 2. Consider the following data
for a closed economy: Y = $20 trillion C = $12 trillion T = $6
trillion Spublic = $2 trillion A. What is the level of private
savings for this economy? B. What is the level of Government
Purchases for this economy? C. What is the level of investment for
this economy?

1) In the Keynesian cross, assume that the consumption function
is given by
C=200+0.75 (Y-T)
Planned investment is 100; government purchases and taxes are
both 100.
Graph planned expenditure as a function of income.
What is the equilibrium level of income?
If government purchases increase to 125 (goes up by 25), what
is the new equilibrium income?

Assume the following equations for the goods and money market of
an economy:
C = 250 + .8(Y-T)
I = 100 - 50r
T = G = 100.
Ms = 200
Md = 0.2Y – 100r
a) Derive the LM curve from the Md and Ms equations given above.
Is this upward or downward sloping? The LM curve is written as Y =
__ +/-__r.
b) Using the equation of the original IS curve and the LM curve
in part...

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