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.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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