Assume That the Consumption Function Is Given by C =

question 12

Essay

Assume that the consumption function is given by C = 200 + 0.5(Y - T) and the investment function is I = 1,000 - 200r, where r is measured in percent, G equals 300, and T equals 200.
a. What is the numerical formula for the IS curve? (Hint: Substitute for C, I, and G in the equation Y = C + I
+ G and then write an equation for Y as a function of r or r as a function of Y.) Express the equation two ways.
b. What is the slope of the IS curve? (Hint: The slope of the IS curve is the coefficient of Y when the IS
curve is written expressing r as a function of Y.)
c. If r is one percent, what is I? What is Y? If r is 3 percent, what is I? What is Y? If r is 5 percent, what is I? What is Y?
d. If G increases, does the IS curve shift upward and to the right or downward and to the left?

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Definitions:

T-account

A visual representation used in accounting to depict the debit and credit sides of an account.

Debits

Financial transactions representing increases in assets or expenses or decreases in liabilities, equity, and income.

Credits

Entries made in the accounting records to increase liabilities or revenues, or to decrease assets or expenses.

Accounts Payable

Liabilities representing amounts owed by a company to suppliers or creditors for goods and services received.