QUESTION 1 (2,000 pts)

Suppose the Jewett-Stahanczyk-Gonzalez economy can be described by the following values:

"C"" = 200",

(" I " ) "= 240""G""= 145" "T"" = 160" ("NX" ) "= 100"

mpc= 0.75,c= 5 ,d= 30 ,x = 15

****Note: you must use( NX = NX - xr )

a)Solve for the equation for the IS curve (call it IS₁). Show at least three lines of derivation.

b)Consider the situation where the goods and services market is in equilibrium. Calculate the real GDP if the real interest rate is 5% (that is, r = 0.05). (Consider this as point A)

c)Consider the situation where the goods and services market is in equilibrium. Calculate the real GDP if the real interest rate is 10% (that is, r = 0.1). (Consider this as point B)

Suppose the government now decides to run a budget deficit of $30 without changing taxes.

d) Solve for the new equation for the IS curve (call it IS₂).

e)Consider the situation where the goods and services market is in equilibrium after the policy change. Calculate the real GDP if the real interest rate is 5% (that is, r = 0.05). (Consider this as point C)

f)Calculate the government spending multiplier.

g) Neatly sketch the IS curves from parts a and e, labeling them IS₁ and IS₂, respectively. Make sure to show points A, B, and C in the diagram