The Interdisciplinary Center Herzliya The Macroeconomic Environment Problem Set Number 3- The IS curve Due Date: Tuesday, April 13th , 2016 on the course website until NOON Assume that the market is closed (i.e. do not trade with other markets). The consumption function C = 200 + 0.75*(Y-T) The Investment 1 = 200 - 25* r Government Spending G = 100 Tax T = 100 Interest Rate r= 5% 1. Find the Equilibrium output (plug the interest rate in the percentage term and not as a decimal fraction, i.e 5). 2. Find the equilibrium output for each level of interest rate between 2% and 8%. (Plug the interest rate in the percentage term and not as a decimal fraction, i.e 2). 5. Draw the IS curve for the values that you found in 2. 2. Use a diagram and explain what will happen to the IS curve in each and every one of the next cases: A. Government spending increase, financed through taxes. B. Government spending increase, financed through selling debt (bonds) to the public. The public believes that in the future a tax will be levied to finance the debt. C. Because of a bullish stock market, the wealth of the public increases. D. Due to the peace process the investors increased investment for any level of interest.E. The Government conducted contracting fiscal policy (meaning that it either reduced G or increased T or both. Analyze the effect on the aggregate demand and proceed from there.)