Consider the following model:

C = 10 + 0.8Y

I = 0.1Y 10i

G=0

1. Find the equation of the IS curve and plot it with Y on x axis and i on y axis. What are the numerical values of the y intercept and slope of the IS curve in your graph?
2. Combine the IS equation with the investment function above to find an expression for investment (I) as a function of output (Y ).
3. Define saving as: S = Y - C

Find the saving function S(Y ). Compare the saving function S(Y ) with the investment

function I(Y ) and explain.

4. Assume that the interest rate is 5%, i.e. i = 0:05. Find the numerical values of the following variables in equilibrium: Y , C, S and I. Verify that your results satisfy the two versions of the goods market equilibrium condition.