Consider the following model of the IS curve without an international sector: Consumption: $C _ { t } / \bar { Y } _ { t } = \bar { a } _ { c } - \bar { b } _ { c } \left( R _ { t } - \bar { r } _ { ) } , \bar { b } _ { c } 0 \right.;$ Investment: $I _ { t } / \bar { Y } _ { t } = \bar { a } _ { i } - \bar { b } _ { i } \left( R _ { t } - \bar { r } { } \right) , \bar { b } _ { i } 0;$ Government expenditure: $G _ { t } = \bar { a } _ { g } \bar { y } _ { t }.$ With this formulation, the IS curve is less steeply sloped than the "standard" IS curve.

Question

Consider the following model of the IS curve without an international sector: Consumption: $C _ { t } / \bar { Y } _ { t } = \bar { a } _ { c } - \bar { b } _ { c } \left( R _ { t } - \bar { r } _ { ) } , \bar { b } _ { c } > 0 \right.;$  Investment: $I _ { t } / \bar { Y } _ { t } = \bar { a } _ { i } - \bar { b } _ { i } \left( R _ { t } - \bar { r }   {       } \right) , \bar { b } _ { i } > 0;$  Government expenditure: $G _ { t } = \bar { a } _ { g } \bar { y } _ { t }.$  With this formulation, the IS curve is less steeply sloped than the "standard" IS curve.

Quizplus · Accepted Answer

The given model of the IS curve without an international sector has a less steep slope because the consumption and investment functions are both affected by the real interest rate. This means that a change in the real interest rate will have a smaller impact on aggregate demand than in the "standard" IS curve, which only considers the effect of the real interest rate on investment.

Consider the Following Model of the IS Curve Without an International