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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. Derive the IS curve. 

    A 0.4Y + 1000r = 340 Correct Answer Incorrect Answer
    B 0.6Y + 1000r = 240 Correct Answer Incorrect Answer
    C 0.4Y + 1000r = 240 Correct Answer Incorrect Answer
    D 0.6Y + 1000r = 340 Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Equalize the planned expenditure and actual expenditure to obtain an equation that relates Y and r.

    The IS curve can be derived as 0.4Y + 1000r = 340.

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