Consider the basic Neoclassical model Sup pose we assume specific functional forms for the consumption and investment demand functions These are C(Y G) c2(Y 1 G 1) e3rt I dir d2A 1 d3K Here, c through c3 and d through d, are fixed parameters governing the sensitivity of consump tion and investment to different factors relevant to those decisions (a) Which variables are endogenous and which ones are exogenous in the above consumption and investment functions (b) What are the signs (i e positive or negative) of c1, c2, and es (For example, is c 0) or 0 ) Determine the sign ( ) of each parameter in the consumption function Explain the economic intuition of the sign of each parameter (c) Apart from the sign of c, what else you can say about the value of c Why (d) What are the signs (i e positive or negative) of d, d2, and da (For example, is d 0 or 0 ) Determine the sign ( ) of each parameter in the investment function Explain the economic intuition of the sign of each parameter (e) The resource constraint Y C I Ge must hold Use the given functional forms for consumption and investment, combined with the resource constraint, to derive an algebraic expression for the IS curve (Hint Substitute in for C, and I, and solve for Y ) (f) Graphically represent how the consumption function, the investment function, and the re source constraint determine the IS curve (g) What is the algebraic expression for the slope of the IS curve What is the sign of the slope of the IS curve Provide the economic intuition (h) Consider a general production function, as seen class, that is Y AF(K, N) The production function has all the standard properties as in the basic model Graphically derive the YS curve

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Question: Consider the basic Neoclassical model. Sup- pose we assume specific functional forms for the consumption and investment demand functions. These are: C(Y-G)+c2(Y++1 - G+1)

Consider the basic Neoclassical model. Sup- pose we assume specific functional forms for the consumption and investment demand functions. These are: C(Y-G)+c2(Y++1 - G+1) -e3rt I-dir + d2A+1+d3K Here, c through c3 and d through d, are fixed parameters governing the sensitivity of consump- tion and investment to different factors relevant to those decisions. (a) Which variables are endogenous and which ones are exogenous in the above consumption and investment functions? (b) What are the signs (i.e. positive or negative) of c1, c2, and es? (For example, is c > 0) or 0 or

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