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Derive the IS curve based on the given information about autonomous spending, investment spending, and interest rates.

Economics

ScanSolve AI Answer

Answer

-500
Graph of I(r) = 8000 − 500r

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Key points of I(r) = 8000 − 500r
Pointry
y-intercept08000
x-intercept160

Step-by-step solution

3 steps
  1. Identify the given points on the investment demand curve.

    At interest rate r=10%r = 10\%, investment spending I=3000I = 3000.
    At interest rate r=8%r = 8\%, investment spending I=4000I = 4000.

  2. Calculate the change in investment and interest rate.

    ΔI=4000−3000=1000\Delta I = 4000 - 3000 = 1000 Δr=8−10=−2\Delta r = 8 - 10 = -2
  3. Calculate the slope of the investment demand curve.

    Formula for slope: m=ΔIΔrm = \frac{\Delta I}{\Delta r}
    Substitute values: m=1000−2=−500m = \frac{1000}{-2} = -500

    The slope of the investment demand curve is −500-500.

    To derive the equation of the investment line:

    I−3000=−500(r−10)I - 3000 = -500(r - 10) I=3000−500r+5000I = 3000 - 500r + 5000 I=8000−500rI = 8000 - 500r

    Check at r=8%r=8\%: I=8000−500(8)=8000−4000=4000I = 8000 - 500(8) = 8000 - 4000 = 4000 ✓

    This linear investment function I(r)=8000−500rI(r) = 8000 - 500r can be used to derive the IS curve via sY=I(r)sY = I(r), or r=16−s500Yr = 16 - \frac{s}{500}Y (where ss is the marginal propensity to save).

    -500

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