1. Desired consumption and investment are C r Y I r 4000 4000 0.20 ;

2400 4000 .

d d

= − +

= −

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, S , d 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?