IS Curve Exogenous Variables and Parameters
Table 1
-Given the values in the table above,equilibrium output Y = ________ when the real interest rate r = 4.
A)26.6
B)0.65
C)14.6
D)5.65
E)none of the above

Question

IS Curve Exogenous Variables and Parameters
Table 1 
-Given the values in the table above,equilibrium output Y = ________ when the real interest rate r = 4.
A)26.6 
B)0.65 
C)14.6 
D)5.65 
E)none of the above

Quizplus · Accepted Answer

The IS curve equation is given by:

Y = C + I(r) + G

where C is the consumption function, I(r) is the investment function (which is negatively related to the real interest rate), G is government spending, and Y is output.

From the table, we can see that:

C = 10 + 0.8Y - 100r
I(r) = 30 - 5r
G = 30

Substituting these values into the IS curve equation, we get:

Y = 10 + 0.8Y - 100r + 30 - 5r + 30

Simplifying, we get:

Y = 70 - 0.2Y - 105r

To find equilibrium output when r = 4, we set r = 4 and solve for Y:

Y = 70 - 0.2Y - 105(4)
Y = 70 - 0.2Y - 420
Y + 0.2Y = 490
1.2Y = 490
Y = 408.33

Therefore, the answer is not given in the options.