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Exercise 3. Calculation with the IS curve and the multiplier. Show how to derive an IS curve that includes the consumption multiplier. That is, assume
Exercise 3. Calculation with the IS curve and the multiplier. Show how to derive an IS curve that includes the consumption multiplier. That is, assume investment is described by It = 5:171: MR: \"517:, and consumption is described by Ct = (10171: + x Y; t. The other categories of expenditures follow the same rules as in class. a) Show how to get the expression of the IS curve for this case. b) Why do we say that there is a multiplier? What is the magnitude of the multipher? Explain the intuition behind the multiplier. Assume i7 = 0.02, b = 0.5,): = 0.4, and that there are no shortterm demand shocks d = 0
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