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    Question

    Consider an economy described by the following equations:

     C = 100 + 0.6 ∗ (Y − T) (consumption function)

     I = 200 − 1000 ∗ r (investment function)

     G = T = 100 (government purchase and tax)

    where Y is the national income and r is the interest rate.

    Suppose the government purchase G is raised from 100 to 150, how much will this shift the IS

    curve to the right? 

    A 100 Correct Answer Incorrect Answer
    B 150 Correct Answer Incorrect Answer
    C 50 Correct Answer Incorrect Answer
    D 125 Correct Answer Incorrect Answer
    E 175 Correct Answer Incorrect Answer

    Solution

    Delta Y = Delta G times multiplier

    This will shift the IS curve to the right by

    50 / (1 − 0.6) = 125.

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