[From Chapter 7] Please answer the following questions.

a) Assume the consumption function is C=1.5 + 0.75(Y-T). What is the marginal

propensity to consume? What is the marginal propensity to save?

b) The trade balance is TB = 5(1-[1/E]) - 0.25(Y-8). What is the marginal propensity to

consume foreign goods? What is the marginal propensity to consume home goods?

c) The investment function is I= 2-10i. What is the investment when the interest rate is

equal to 10% or 0.10?

d) Assume government spending is given by G. Write down an expression for Aggregate

Demand (D).

e) Assume that the forex market equilibrium is given by: i = ([1/E]-1) + 0.10, where the

two foreign returns in the right hand side are the expected depreciation, and the foreign interest rate. What is the foreign interest rate? What is the expected future exchange rate?

f) Solve for the IS curve: obtain an expression for Y in terms of i, G and T (eliminate E).