Question
Consider an economy described by the following equations: C = 100 + 0.6 ∗ (Y −
- T (consumption function) I = 200 − 1000 ∗ r (investment function) G = T = 100 (government purchase and tax) where Y is the national income and r is the interest rate. Suppose the government purchase G is raised from 100 to 150, how much will this shift the IS curve to the right?
Solution
Delta Y = Delta G times multiplier
This will shift the IS curve to the right by
50 / (1 − 0.6) = 125.
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