Assignment 3:

A IS-LM model:

We consider a economic system, where our GDP, which is given by:

Z = C(Y T) + G + I(r),

C(Y T) = C0 + C1(Y T),

I(r) = I0 I1r,

Where Z is planned expenses, our Y is our GDP, T our taxes, G is our government purchases, I is our investments, r is interest rates.

C0, C1, I0, I1 > 0 are all paramters and C1 < 1.

Our T and G is Exogenous variables. Also in this part of the assignment r is Exogenous

Now for the question:

Explain why our function: C(Y - T) looks the way it does and why 0 < C1 < 1 is a fair assumption?