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Questions › JNU › JNU SSS 2018 › Q42
5 marksMacroeconomics › IS-LM model › The slope of the IS curveHardabout 10 min

JNU SSS 2018 Question 42: IS-LM model

Consider an economy in which C=225−10r+0⋅85(Y−T)C = 225 - 10r + 0\cdot85(Y - T)C=225−10r+0⋅85(Y−T), I=1610−30rI = 1610 - 30rI=1610−30r, G=1650G = 1650G=1650, X=1400X = 1400X=1400, M=700+0⋅08YM = 700 + 0\cdot08YM=700+0⋅08Y and T=100+0⋅2YT = 100 + 0\cdot2YT=100+0⋅2Y, where YYY : aggregate income, CCC : aggregate consumption expenditure, III : aggregate investment expenditure, GGG : government expenditure on goods and services, XXX : exports, MMM : imports, TTT : tax revenues and rrr : rate of interest (expressed in percent).

(a) What is the slope of the IS curve for this economy?

(b) Assuming that the value of (Y,r)(Y, r)(Y,r) in the economy lies on the IS curve, what is the budget deficit of the government when the rate of interest is 3 percent?

Answer and worked solution

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Plain-text version

Consider an economy in which C = 225 - 10r + 0·85(Y - T), I = 1610 - 30r, G = 1650, X = 1400, M = 700 + 0·08Y and T = 100 + 0·2Y, where Y: aggregate income, C: aggregate consumption expenditure, I: aggregate investment expenditure, G: government expenditure on goods and services, X: exports, M: imports, T: tax revenues and r: rate of interest (expressed in percent). (a) What is the slope of the IS curve for this economy? (b) Assuming that the value of (Y, r) in the economy lies on the IS curve, what is the budget deficit of the government when the rate of interest is 3 percent?

Also written as: Consider an economy in which C = 225 - 10r + 0*85(Y - T), I = 1610 - 30r, G = 1650, X = 1400, M = 700 + 0*08Y and T = 100 + 0*2Y, where Y: aggregate income, C: aggregate consumption expenditure, I: aggregate investment expenditure, G: government expenditure on goods and services, X: exports, M: imports, T: tax revenues and r: rate of interest (expressed in percent). (a) What is the slope of the IS curve for this economy? (b) Assuming that the value of (Y, r) in the economy lies on the IS curve, what is the budget deficit of the government when the rate of interest is 3 percent?

IS-LM model has come up 137 times in 7 exams since 2004.

What this question tests

This question is on The slope of the IS curve, part of IS-LM model in Macroeconomics.

What makes the IS curve steep or flat, including the multiplier and the interest sensitivity of investment.

TestStop has 14 past-paper questions on this subtopic.

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