Goods Market & IS Curve

Question 1

Goods Market E & IS Curve equation

Answer 1

Occurs where Y = AE , represented by a 45degree line, equilibrium occurs where C+I intersects with the line

• Income = Aggregate Expenditure
• Aggregate expenditure (AE) = Investment (I) + Consumption (C)

IS Curve equation
To find formally, rearrange equilibrium condition to make i the subject:
Y = c * Y + ī - B*i
Y (1-c) = ī - B*i
B*i + Y (1-c) = ī 
B*i = ī - Y(1-c)
i = ī - Y(1-c) / B

Question 2

Consumption Function & Graphing

Answer 2

C = c * Y
- c is the marginal propensity to consume

• Upwards sloping from origin, Y-axis (C) X-axis (Y)

Question 3

Investment Function

Answer 3

I = ī - b * i
Investment = Autonomous Investment - interest sensitivity - nominal interest rate

• Dow

Question 4

IS Curve, Slope, Intercept & Position

Answer 4

Have y-axis (I) x-axis (y)

• Downwards sloping
• b is determinant of the slope, higher b means flatter IS curve
• ī is determinant of position of curve, rise in ī shifts the curve upwards

Question 5

Basic Investment Multiplier Finding

Answer 5

• Shows effect of change in ī on Y
• To find rearrange goods market e making Y the subject
  Y = AE
  = c * Y + ī - bi
  Y (1-c) = ī - bi
  Y = ī - b*i / (1-c)
• Then partially differentiate with respect to ī giving: 1 / (1 - c) > 0
• As it is positive shows rise in investment increases income

Question 6

Introducing Government into Model & Revised IS Curve equation (position)

Answer 6

• Adds 3rd component of AE = C + I + G
• Revised IS equation = ī + G − Y(1 − c)
  remains downward sloping
  b remains main determinant of slope
  ī remains determinant of position, G also determinant

Question 7

Basic Government spending Multiplier & Finding

Answer 7

• Shows effect of change in G on Y
• Re-arrange goods market e making Y the subject
  Y = AE
  = cY + ī − bi + G
  Y(1 − c) = ī + G − bi
  Y = ( ī + G − bi)/(1 − c)
• Then partially differentiate with respect to G
  1/(1 − c) > 0
• As positive value shows importance of G in Y