Assume the consumption function is given by C=200+0.5(Y-T) and the investment function is I=1000-200r, where r is in percent. G equals 300 and T equals 200. Find the equation for the IS curve (hint: use the formula for equilibrium Y = C + I + G and then derive Y as a function of r)
What is the slope of the IS curve (i.e. the coefficient of Y when r is expressed as a function of Y). How is the investment function related to the slope of the IS?
If r is 1%, what is I? What is Y? If r is 3%, what is I? What is Y? If r is 5%, what is I? What is Y?
If G increases by 50, does the IS curve shift left or right? Can you find the exact magnitude of the shift? (Hint: you would have to calculate the Govt. multiplier assuming interest rates fixed. Then the horizontal shift of the IS curve can be calculated using the multiplier and change in government expenditure)
If r is 1%, what is Y along LM curve? If r is 3%, what is Y along LM curve? If r is 5%, what is Y along LM curve?
If P increases and M is constant, which direction does the LM curve shift? If P is constant but M increases, how would the LM shift?