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Homework answers / question archive / 20
20. If Okun's Law says that the percentage change in GDP is equal to 2 multiplied by the change in the unemployment rate, then a decrease in output by 1.5 percentage point will cause unemployment to A) decrease by one-half percentage point B) increase by 1.5 percentage points C) increase by 3 percentage points I D) decrease by 2 percentage points
29. Desired consumption is cd = 200 + 0.87, and desired investment is id = 300 - 1000r. Real money demand is mdp = Y-2000r. Government spending G = 200, and real money supply is MIP 2100. The economy is closed. Derive the IS curve equation
20 Option B.
According to the Okun's Law, a decrease in output by 1.5 percentage point will cause unemployment to increase and it will increase by 1.5 per centage point.
29
Given that:
C = 200 + 0.8Y
I = 300 - 1000r
G = 200
IS equation is found by:
Y = C + I + G
Y = 200 + 0.8Y + 300 - 1000r + 200
Y = 700 + 0.8Y - 1000r
0.2Y = 700 - 1000r
Y = 3500 - 5000r
This is the IS equation
