Let us assume a closed economy with government expenditure (Go), household expenditure (Co) are autonomous and investment as a function of interest rate. For simplicity, let us say interest rate increases from R1, to R2.

**a)** Use a well labelled graph to show the relationship between investment and interest rate.

**b,** Draw the Keynesian cross when interest rate increases from 12, to 122 while government expenditure (Go) and household expenditure (Co) remain constant

**C,** user answers in part a) and b) to derive IS curve.

**d)** Show the effect of contractionary fiscal policy on equilibrium national income and equilibrium interest rate.

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