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

c and m

Step-by-step 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

`((1 - c)Y - CC)/(m)=r`

`((1-c)Y)/(m) -(CC)/(m)=r`

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

`(dr)/(dY)=((1-c))/(m)`

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