1. Consider the following description of the real sector of the economy:

Y = C + I + G

C = C₀ + mpc x Y_D

Y_D = Y - T

T = T₀ + tY

I = d - er

G = G₀

Answer the following questions by rearrange terms and solve for r in terms of Y. We in fact place r on the vertical axis when we draw the IS-curve.

a. Draw the IS-curve. What is formula for the slope of the IS-curve, Δr/ΔY?

b. If e = 0, draw the investment curve and the IS-curve. What does this imply?

c. How is the slope of the IS-curve affected as e increases?

d. What happens when e = ∞? What does this imply?