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Unformatted text preview: ] + [ 200 10 r ] + [ 150 ] E = 125 + 0.75 (Y 100) + [200 10 r] + 150 E = 475 + 0.75 Y 0.75 (100) 10 r E = 400 + 0.75 Y 10 r Since E = Y in equilibrium, then Y = 400 + 0.75 Y 10 r Y 0.75 Y = 400 10 r 0.25 Y = 400 10 r Y = [1 / 0.25] [400 10 r] Y = 4 [400 10 r] Y = 1600 40 r {This is the equation for the IS Curve} If we examine the components of this equation, we can see that changes in Fiscal Policy (government spending and taxes) have an effect on the IS curve. When either G, T or both change, they cause a SHIFT in the IS curve. When government spending increases, the IS shifts right. When taxes decrease the IS curve also shifts right. Think about the opposite case....
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 Spring '09
 Smith
 Macroeconomics

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