study questions for lecture 11

study questions for lecture 11 - DI =(1-t)Y disposable...

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Objectives for Lecture 11 The student will z learn what the IS curve is. z learn how to derive the IS curve. z review what types of events cause an increase (decrease) in spending z learn that increases in spending (given no change in the real rate of interest) cause the IS curve to shift to the right. z learn what the Fisher equation is. Questions for Lecture 11 Questions from Lecture 11. 1. Define the IS curve. 2. What is the difference between the nominal rate of interest and the real rate of interest? Which one affects spending? 3. Present a graphical derivation of the IS curve. 4. Using graphs, show that an increase in government spending causes the IS curve to shift to the right. 5. Show that an increase in taxes causes the IS curve to shift to the left. 6. Assume that total expenditure = C + I + G + (X-M). If C = 800 + (¾)×DI, consumption depends upon disposable income
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Unformatted text preview: DI = (1-t)Y, disposable income is income after taxes have been paid t = (1/5), the tax rate is one-fifth G = 500, government spending is 500. I = 1000 - 15× i , investment spending declines as the rate of interest increases. (X – M) = -300, net exports is a negative 300. (a) Use the above information to obtain an expression for total expenditure. (Hint: I get E = 2000 + (3/5)Y – 15 i .) (b) Setting total expenditure equal to output, and solve the equation to get an expression for the IS curve. (c) What would the new expression for the IS curve be if the tax rate is increased from one-fifth to one-fourth? Does the new IS curve lie to the right or to the left of the original one? Which IS curve has the steeper slope? Page 1 of 1 Untitled Document 8/9/2007 file://C:\Documents and Settings\smorgan1\My Documents\She's stuff\Math100 - Dr. Wu\S. .....
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