Question

Assume an economy where the consumption function is defined as C = CC + cY, and the investment function is defined as I = mr, where Y is total income, and r is the interest rate. What does the slope of the IS curve depend on?

Answer 1

Answer:

c and m

Explanation:

Given that,

Consumption function: C = CC + cY

Investment function: I = mr

where,

Y = Total income

r = Interest rate

The equation for IS curve is as follows:

Y = C + I

Y = CC + cY + mr

Y - cY = CC + mr

(1 - c)Y = CC + mr

(1 - c)Y - CC = mr

$\frac{(1 - c)Y - CC}{m}=r$

$\frac{(1-c)Y}{m} -\frac{CC}{m}=r$

Slope of the IS curve is determined by differentiating 'r' w.r.t 'Y',

$\frac{dr}{dY}=\frac{(1-c)}{m}$

Hence, the slope of the IS curve depends on the value of c and m.