If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is:
A) Y = 400 - 0.75T - 25r + G.
B) Y = 1,600 - 3T - 100r + 4G.
C) Y = 400 + 0.75T - 25r - G.
D) Y = 1,600 + 3T - 100r - 4G.

Question

Quizplus · Accepted Answer

The IS curve represents the equilibrium where investment equals savings. The formula for the IS curve can be derived from the equilibrium condition Y = C + I + G. Substituting the given equations for C and I into this, we get Y = 200 + 0.75(Y - T) + 200 - 25r + G. Simplifying this equation to solve for Y in terms of T, r, and G gives us the formula Y = 1,600 - 3T - 100r + 4G, which matches choice B.

If Consumption Is Given by C = 200 + 0