Economics IS-LM curve, equations etc

SECTION B

a )The consumption function is denoted by

C a b (Y - T ) - gr

This function shows the various factors which determine the amount of aggregate private consumption in the economy . Consumption is affected by the amount of disposable income which an individual has . The disposable income is the income left after deduction of tax , thus here it is denoted by (Y-T .As denoted by the positive sign associated with , b , as the disposable income increases , the amount of consumption also increases . Here , the co-efficient attached with the disposable

income is known at the marginal propensity to consume . In technical terms , it is the slope of the consumption function . In economic terms , b , is the marginal propensity to consume . It shows the change in the amount of consumption , when disposable income rises by one unit . Another determinant of the amount of private consumption is the interest rate r . Intuitively , as the interest rate increases , individuals would want to allocate more of their fixed disposable income to savings as the opportunity cost of consumption increases . Thus , as interest rates rise (fall , one would expect consumption to fall (rise , which is borne out by the negative sign attached with the interest term in the consumption function . The coefficient , g , is the interest elasticity of consumption and shows the change in consumption with a unit change in the interest rate . If we keep the interest rate fixed , the consumption function can be depicted graphically as

Here , C1 corresponds to the consumption...