In a closed (no foreign sector), mixed economy with stable prices, if we assume that consumption (C) and investment (I) do not depend on the interest rate (r), can we conclude that:
a. the IS curve is vertical?
b. monetary policy has no effect on real income and output?
I have attached the completed solution.
Consumption and investment depend on potential of the expectations. To get into account the achieve of expectations.
Previous, the IS relation was:
Describe aggregate private spend or merely, private spend, A, as:
Rework the IS relative as:
With incorporate the function of prospect, then:
Prime denote expectations value, and es estimated values
The positive and negative symbols clarify how:
A. the IS curve is vertical?
The original IS Curve:
Given expectations, a decline in the real interest rate leads to ...
This solution is comprised of a detailed explanation to answer what is the IS curve is vertical.