Suppose that the consumption function is given by
C =270 +0.63Y -1,000R
Rather than by the consumption function in Chapter 8. Add this consumption
Function to the other four equations of the macro model:
Y _=C + I +G + X
M = (0.1583 Y- 1,000R)P
I =1,000 -2,000R
X =525- 0.1Y -500R.
Treat the price level as predetermined at 1.0 and let government spending be $1,200 and the money supply be $900.
a. Derive an algebraic expression for the IS curve for this model and plot it to scale.
b. Derive the aggregate demand curve and plot it to scale.
c. Calculate the effect of an increase in government spending on GDP. Is the effect larger or smaller than in the case where consumption does not depend on the interest rate? Describe the process of crowding out in this case.
d. Calculate the effect of an increase in the money supply on GDP. Is the impact larger or smaller than in the case where consumption does not depend on the interest rate? Explain.