Consider an economy described by the following:
C̅ = $3.25 trillion
I̅ = $1.3 trillion
G̅ = $3.5 trillion
T̅ = $3.0 trillion
N̅X̅ = -$1.0 trillion
f̅ = 1
mpc = 0.75
d = 0.3
x = 0.1
a. Calculate simplified expressions for the consumption function, investment function, and net export function.
b. Calculate an expression for the IS curve.
c. If the real interest rate is r = 2, then what is equilibrium output? If r = 5, then what is equilibrium output?
d. Draw a graph of the IS curve, showing the answers from part (c) above.
e. If government purchases increases to $4.2 trillion, what will happen to equilibrium output at r = 2? What happens to equilibrium output at r = 5? Show the effect of the increase in government purchases in your graph from part (d).
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