Suppose an economy has a consumption function given by C = 100 + 0.8(Y - T), where Y is output, T is taxes, and C is consumption. Investment is fixed at 200, government spending is 500, taxes are 300, and net exports are 50. The nominal money supply is 1000 and the price level is 2. Use the IS-LM model to answer the following questions:

a) Derive the IS curve and the LM curve.
b) Calculate the equilibrium output and real interest rate.
c) If the government increases taxes by 50, what is the new equilibrium output and real interest rate? What is the tax multiplier and the government spending multiplier?

Answer rating: 100% (QA)

The detailed answer for the above question is provided below a The IS curve represents the equilibrium condition in the goods market and is given by t... View the full answer