Question

1. Show how to derive the IS curve as we specified in the class. Show all the necessary steps (from the very beginning) to derive the IS curve. Draw a graph of the IS curve as well. What is the slope of the IS curve? What's the intuition of the sign of slope (positive or negative)? Explain clearly. 2. Analyzing macroeconomic events with the IS curve: consider the following events in the macroeconomy. Show how to think about them using the IS curve (be detail and specific about what changes in the IS model), and explain how and why GDP is affected in the short run. Please be sure that you analyze these events under the condition of ceteris paribus (everything else is same). You must explain graphically as well as in words (a) Consumers become pessimistic about the state of the economy and hence reduce the consumption. (b) The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they get a credit that reduces the taxes they pay on corporate income.