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Question
This exercise will ask you to work through the derivation of the IS curve under various different scenarios.
A) Graphically derive the IS curve for a generic specification of the consumption function and the investment demand function.
B) Suppose that investment demand is relatively more sensitive to the real interest rate than in (A). Relative to (A), how will this impact the shape of the IS curve?
C) Suppose that the MPC is larger than in (A). How will this affect the shape of the IS curve?
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Comment on the effect of a recession on the investment curve (only) and on the level of savings, investment, and the equilibrium real interest rate in the financial crisis that hits United States first starting in fall 2007.
How will a fall in domestic investment affect the trade surplus and net capital outflows in the domestic economy, the trade deficit and capital inflows in the rest of the world.
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