The Economics of Money, Banking, and Financial Markets 10th Edition by Frederic Mishkin

Exercise 2

All applied problems are available in MyEconLab at www.myeconlab.com.
Consider an economy described by the following:
C = $3.25 trillion
I = $1.3 trillion
G = $3.5 trillion
T = $3.0 trillion
N X = -$1.0 trillion
f = 1
mpc = 0.75
d = 0.3
x = 0.1
a. Calculate simplified expressions for the consumption function, investment function, and net export function.
b. Calculate an expression for the IS curve.
c. If the real interest rate is r = 2, then what is equilibrium output? If r = 5, then what is equilibrium output?
d. Draw a graph of the IS curve, showing the answers from part (c) above.
e. If government purchases increases to $4.2 trillion, what will happen to equilibrium output at r = 2? What happens to equilibrium output at r = 5?
Show the effect of the increase in government purchases in your graph from part (d).