Question

You will need to analyse the IS-LM model algebraically. Setting up a closed economy for the short-run model, the market for goods and services is given as Yz = Ct + It +G+ whereby - Ct ac + c(V– at)) ⓇY+ - It (a dj – 5(r+ – 7)) ⓇY -) * - G+ = ag XYZ a. To obtain the IS curve, solve for short-run output, Ķz. b. How does the slope of the IS curve depend on the parameter 7, the sensi- tivity of investment to changes in interest rates? Refer to your answer to part (a) and explain the intuition. c. Which will cause a bigger horizontal shift in the IS curve, a 2% tax cut or a 2% increase in government spending? Refer to your answer to part (a) and explain the intuition.

Answer 1

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