Derive Equation For IS Curve And Draw A Diagram


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.



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

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