Question

With regards to deriving the IS curve mathematically. ( in a closed economy with a govt)

The answer is Y= Ac - er + c( Y -T ) + Ai -dr + G

I am trying to fully understand this can you assist, am i correct in saying:-

The Consumption part is Ac - er +c
The Investment part is Ai - dr

Ac and Ai i assume are aggregate consumption and Aggregate investment
But what is er ? and what is dr ? ( r being the interest rate) , but what exactly is e and d ?

I am taking a guess , but is dr the interest accrued on inventories ? Not sure on er

Thanks for assistance

Answer 1

The consumption part is Ac - er + c(Y - T), the Investment part is Ai - dr.

Ac and Ai i assume are autonomous consumption and autonomous investment.

er is part of the consumption function dr is induced investment (r being the interest rate).