## Solution Library

# Derive Equation For IS Curve And Draw A Diagram

**Question**

In an economy, consumption is *C = *30 + 1/2 (*Y*-*T*); investment is *I = *25 - 110 *i*; tax revenue is *T *= 20; and government expenditure is *G *= 20. *Y *is the level of real output. The demand for real money balances, *M/P*, is *Y i-*1. The interest rate is set at 4% (i.e., *i* = 0.04) by the central bank. The price level, *P*, is constant at 1.

(a) Derive the equation of the IS curve and roughly sketch it in a diagram.

(b) Roughly sketch the *LM *curve, and show the short-run equilibrium.

(c) Compute the goods market multiplier.

(d) Compute the short-run equilibrium levels of output, consumption and investment.

(e) If the central bank raised the interest rate to 6%, compute the new level of output.

(f) If *G *rose to 25, and *i *remained at 6%, compute the new level of output.

**Summary**

The question belongs to Economics and it discusses about deriving an equation of the IS curve and drawing a diagram.

**Total Word Count 483**

## Comments

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