... = 5500 + 0.8Y - 2400 -100i = 3100 + 0.8Y- 100i 100i = 3100 + 0.8Y - Y i = 31 -Y [3]. Equation [3] is the IS curve and it has a slope of - with a vertical intercept of 31. IS curves become flatter as the marginal propensity to consume increases. The small value of the slope shows that consumption and investment are highly sensitive to changes in interest rates in the economy (Burda & Wyplosz 2003). Fig.1 (a) and (b) shows the diagrammatic derivation of the IS curve. Given that the money demand (MD) curve is given by L(Y, i, c) = 0.5Y - 300i + 50c where c is the cost of converting other forms of wealth into money and has a value equal to 10, equilibrium in the money markets demands that the money supply (MS) equals the money demand (MS = MD). MS = MD = = L(Y, i, ...

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