Question

Please help with "An expression for the IS curve" and the 4 questions under it. Thanks.

14. Consider an economy described by the following: C $3.3 trillion 7 $1.4 trillion G $2.8 trillion T $3 trillion 7-1 mpc 0 75 d 0.3 x 02 NX = $-1 trillion The simplified expression for the consumption function is: OA. C 1.05+ (1-0.75)Y B. C 1.05+0.75Y O C. C 3.3+(1-0.75)Y O D. C 3.3+0.75Y The simplified expression for the investment function is A., I-1.1-0.3r O B. 1-1.1-0.75r O C. 1 33-0.75r. O D. 1-3.3-0.3r The simplified expression for the net export function is O A. NX=-0.75-0.2r. B. NX=-1-0.2r O C. NX=-0.2-1r O D. NX=-1.1-0.75r An expression for the IS curve is O A. Y 15.8-3.3r O B. Y 2-15.8r O C. Y 15.8-1.1r O D. Y 15.8-2r If the real interest rate is r 1, equilibrium output Y S trillion. (Round your response to one decimal place) If the real interest rate is r 4, equilibrium output Y= S trillion. (Round your response to ane decimal place) If government purchases increase to $3.5 trillion and the real interest rate r 1, equilibrium output Y $ response to one decimal place.) trillion. (Round your If government purchases increase to $3.5 trillion and the real interest rate r 4, equilibrium output Y- S trillion. (Round your response to one decimal place.)

Answer 1

(1)

In goods market equilbrium, Y = C + I + G + NX

Y = 1.05 + 0.75Y + 1.1 - 0.3r + 2.8 - 1 - 0.2r

0.25Y = 3.95 - 0.5r

Y = 15.8 - 2r (IS equation)

(2)  

When r = 1,

Y = 15.8 - 2 x 1 = 15.8 - 2 = 13.8

(3)

When r = 4,

Y = 15.8 - 2 x 4 = 15.8 - 8 = 7.8

(4) G = 3.5, r = 1 [G increase by (3.5 - 2.8) = 0.7]

From goods market equilibrium condition,

0.25Y = 3.95 - 0.5r + 0.7

0.25Y = 4.65 - 0.5r

Y = 18.6 - 2r (new IS equation)

Y = 18.6 - 2 x 1 = 18.6 - 2 = 16.6

(5) G = 3.5, r = 4

Y = 18.6 - 2 x 4 = 18.6 - 8 = 10.6