1. Desired consumption and investment are Cd = 4000 - 4000r + 0.20Y; I d = 2400 - 4000r. As usual, Y is output and r is the real interest rate. Government purchases, G, are 2000.

a. Find an equation relating desired national saving, Sd , to r and Y.

b. What value of the real interest rate clears the goods market when Y = 10,000? Use both forms of the goods market equilibrium condition. What value of the real interest rate clears the goods market when Y = 10,200? Graph the IS curve.

c. Government purchases rise to 2400. How does this increase change the equation for national saving in Part (a)? What value of the real interest rate clears the goods market when Y = 10,000? Use both forms of the goods market equilibrium condition. How is the IS curve affected by the increase in G?