N2

(b) Write the equation for the IS curve as given in class, and explain the meaning of each of the following variables: C, I, G, T, r, and m.

(c) Considering your answer from b, suppose that C = 10, I = 4, G = 8, T = 4, m = 1 2 , and c = d = 1 2 . Graph the IS curve as a function of r.

(d) Comparing your answer to what you found in part c, show what happens to the IS curve after an increase in government spending by setting G = 10. Does this make sense intuitively? Why?

(e) Comparing your answer to what you found in part c, show what happens to the IS curve after an increase in taxes by choosing a larger value for T = 10 (where G is once again 8). Does this make sense intuitively? Why?