Question

Consider the following numerical model:

C = 700 + 0.8Y_D

I = 500-2000i+0.1Y

G = 400

T = 500

- Find the equation for the IS curve (keep in mind that Y_D=Y-T). If you were to draw the IS curve, what would the intercept (where the IS curve crosses the Y vertical axis) be? (and find the intercept in relation to Y - ie in the form Y=a-bi where a is the intercept)

- If G increases from 400 to 600, how much income (Y) changes for any given level of the interest rate in the goods-market equilibrium?

- If T decreases from 500 to 300, how much income (Y) changes for any given level of the interest rate in the goods-market equilibrium? (Add a + or - to the number you reach depending on whether the change is positive or negative)

Answer 1

10 +07 (-) ya Despesabls T500 & yd 6-500) nome >> C= 700 +0.8LY-SPD) 333333333 15: ly=C+I+G (Goods maxkat equilib Y 700 +0.8LY-T + 5.0D 2000+ 0. + 40) => y= 700 70.8/-500 + 50D - 2.000+ 0.19 +40) Y= 700+ 0.84 – 400 +500 - 200OL + 0.1% +4000 > Y-0.44 = 1200 - 2000 O Y = 12.00 - 2000 = y 2000 - 20000 - Iscurve equation as Y= a-bi .. Intercept = 1200D 46 - 400 to 600 = 600-400 = 200 As Y= ct ITG for Change AY AC+AL+AG ty=700 tot 79-500) classmate

AY = 0.8 AY TO AY + AG (from equation (D) ised only those terme in which AG is useful AY= 0.8 Ay+oAY + AG AY-0.90Y DG OLAY = 200 by = 200 AY2012 Equilibrium income bu 2000 units will increase by 2000 of T from 500 to 300 decreases T= -200 from equation o AY = 0.8 Ay - 0.8-200 + OLAY DY-0.9A7 = + 160 olay = 160 Y = 160 is AY=1600 Equilibrum income will increase 1600 units. Intuttriely also this true. A A decline decline in taxes an increase in disposable income