Use the equation for the IS curve shown in Section 1.2.3 to answer the following questions:...

  

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Use the equation for the IS curve shown in Section 1.2.3 to answer the following questions: (a) If we assume that 0 < C1, t < 1, then what can we say about the size of multiplier? (b) If there is a decrease in government spending of AG, by how much does this decrease output? (c) Describe the feedback process that means a decrease in government spending can de- crease output by more than 1:1. 1.2.3 The IS curve Deriving the IS equation Throughout this book, we use the IS curve to represent the demand side of the economy. In this subsection, we derive the IS curve and use it as a starting point to think about how monetary and fiscal policy work. As we discussed in Section 1.1.2, the IS curve shows the combinations of output and the real interest rate at which the goods market is in equilibrium. We first set out the relationship between the real interest rate, r, and the nominal interest rate, i. This relationship is shown by the Fisher equation: r=i-n. (Fisher equation) 4 We can confirm that the change in aggregate saving is equal to zero. Using Equation 1.7: Ay = Fa-Aco. - q(1 - t) -- 4co]- Aco = 0. Use the equation for the IS curve shown in Section 1.2.3 to answer the following questions: (a) If we assume that 0 < C1, t < 1, then what can we say about the size of multiplier? (b) If there is a decrease in government spending of AG, by how much does this decrease output? (c) Describe the feedback process that means a decrease in government spending can de- crease output by more than 1:1. 1.2.3 The IS curve Deriving the IS equation Throughout this book, we use the IS curve to represent the demand side of the economy. In this subsection, we derive the IS curve and use it as a starting point to think about how monetary and fiscal policy work. As we discussed in Section 1.1.2, the IS curve shows the combinations of output and the real interest rate at which the goods market is in equilibrium. We first set out the relationship between the real interest rate, r, and the nominal interest rate, i. This relationship is shown by the Fisher equation: r=i-n. (Fisher equation) 4 We can confirm that the change in aggregate saving is equal to zero. Using Equation 1.7: Ay = Fa-Aco. - q(1 - t) -- 4co]- Aco = 0.

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solution a Because 0 G Thus output falls by more than the fall in the government ... View the full answer