A general-functional form of the IS-LM model is given. A goods market is described by the following set of equations: Y = C + 1 + G C = C(Y – T) where yd = Y –T and hence C = C{Y") G = Go |= |(r) where dl/dr = l'(r) < 0 T= T(Y) where dT/dY = T'(Y) is the marginal tax rate (0< T'(Y) < 1). The money market can be described by the following three equations: M* = L(Y, r) which is money demand where Ly > 0 and L, < 0 M° = Mo which is money supply where the money supply is assumed to be exogenously determined by the central monetary authority, and M = M which is equilibrium condition. All of the above functions are assumed to have continuous derivatives According to this model a) find the slope of LM curve and b) find the effect of a change in Go on equilibrium income level and equilibrium interest rate.

A general-functional form of the IS-LM model is given. A goods market is described by the following set of equations: Y = C + 1 + G C = C(Y – T) where yd = Y –T and hence C = C{Y") G = Go |= |(r) where dl/dr = l'(r) < 0 T= T(Y) where dT/dY = T'(Y) is the marginal tax rate (0< T'(Y) < 1). The money market can be described by the following three equations: M* = L(Y, r) which is money demand where Ly > 0 and L, < 0 M° = Mo which is money supply where the money supply is assumed to be exogenously determined by the central monetary authority, and M = M which is equilibrium condition. All of the above functions are assumed to have continuous derivatives According to this model a) find the slope of LM curve and b) find the effect of a change in Go on equilibrium income level and equilibrium interest rate.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter15: Macroeconomic Viewpoints: New Keynesian, Monetarist, And New Classical

Section: Chapter Questions

Problem 10E

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