Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 11, Problem 10E
(a)
To determine
Derive the IS curve for the given situation.
(b)
To determine
The difference between the new IS curve and the original IS curve.
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Students have asked these similar questions
Consumption and the real interest rate: According to the life-cycle / permanent-income hypothesis, consumption depends on the present discounted value of income. An increase in the real interest rate will make future income worth less, thereby reducing the present discounted value and reducing consumption. To incorporate this channel into the model, suppose the consumption equation is given by Assume the remainder of the model is unchanged from the original setup, as in Table 11.1. (a) Derive the IS curve for this new specification. (b) How and why does it differ from the original IS curve?
Consider the following information on aggregate income, consumption expenditure, and planned investment for a country:
This problem asks you to analyze the IS-LM model algebraically. Suppose consumption
is a linear function of disposable income:
C(YT) = a + b(YT)
where a > 0 and 0 0 and d > 0.
(a) Solve for Y as a function of r, the exogenous variables G and T, and the model's
parameters a, b, c, and d.
(b) How does the slope of the IS curve depend on the parameter d, the interest rate
sensitivity of investment? Refer to your answer to part (a), and explain the intu-
ition.
(c) Which will cause a bigger horizontal shift in the IS curve, a $100 tax cut or a $100
increase in government spending? Refer to your answer to part (a), and explain
the intuition.
Chapter 11 Solutions
Macroeconomics (Fourth Edition)
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