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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. Derive the IS curve. 

A 0.4Y + 1000r = 340 Correct Answer Incorrect Answer
B 0.6Y + 1000r = 240 Correct Answer Incorrect Answer
C 0.4Y + 1000r = 240 Correct Answer Incorrect Answer
D 0.6Y + 1000r = 340 Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

Equalize the planned expenditure and actual expenditure to obtain an equation that relates Y and r.

The IS curve can be derived as 0.4Y + 1000r = 340.

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