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    Interest Rate

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    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?

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    Solution Preview

    Hello Student,
    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 ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what is the IS curve is vertical.