Two economists have estimated both consumption and investment functions. Their results are shown below.
Economist A Economist B
Consumption. C = 500 + .8YD C = 400 + .5YD
Investment. I = 800 + .1Y - 25i I = 1000 + .2Y - 100i
(a) Find the size of the multiplier in each case. Use the formula for the multiplier (no need to solve the model).
(b) Find the equation for the IS curve in each case.
(c) Which IS curve has the steepest slope? Compare numerically.
(d) Fiscal policy: If there is a rise in G, which economy will have the largest change in Y? Explain.
(e) Monetary policy: In which economy will expansionary monetary policy have the greatest effect on Y? Explain.
(f) Explain why the policy impacts are different by examining the parameters of the IS curve.
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