Economics 470

Fall 2008

Homework 6

Due Thursday, November 13

1. Explain why (a) investment and the interest rate are inversely related, and (b) net exports and the interest rate are inversely related.

2. (a) Derive the IS curve from the 45 degree line diagram. (b) Use the 45
degree line diagram to show how the IS curve shifts when there is a decrease in
taxes.

3. Derive the LM curve for the case where the economy contains a liquidity trap.