Consider the economy of XYZ, has the following indicators in the table below: Ct = 0.7Yt ̅Gt = 0.2Yt ̅EXt = 0.20Yt ̅IMt = 0.25Yt ̅It = 0.30 − 2.0(Rt − 1.2)Yt ̅A. Derive the IS equation. Explain why the IS curve has downward slope. B. Estimate the short-run output when real interest rate equals to 2 percent. C. Calculate the value of multiplier and interpret the result.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter24: The Aggregate Demand/aggregate Supply Model

Section: Chapter Questions

Problem 43CTQ: Economists expect that as the labor market continues to tighten going into the latter part of 2015...

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Question

Consider the economy of XYZ, has the following indicators in the table below:
Ct = 0.7Yt
̅Gt = 0.2Yt
̅EXt = 0.20Yt
̅IMt = 0.25Yt
̅It = 0.30 − 2.0(Rt − 1.2)Yt
̅A. Derive the IS equation. Explain why the IS curve has downward slope.
B. Estimate the short-run output when real interest rate equals to 2 percent.
C. Calculate the value of multiplier and interpret the result.
D. Suppose the government increases the expenditure such as:
Gt = 0.3Yt
̅Show the impact on IS curve in graphically, and calculate the government expenditure multiplier.
How much short-run output change? Explain the reason.

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