Derive two LM curves, the first when money demand is very sensitive to the interest rate, and the second where money demand is insensitive to the rate of interest. Show how the slopes of the LM curves differ
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Derive two LM
rate, and the second where money demand is insensitive to the rate of interest. Show how
the slopes of the LM curves differ
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- Give typing answer with explanation and conclusion A standard "money demand" function used by macroeconomists has the form ln(m)=β0+β1ln(GDP)+β2R, Where m is the quantity of (real) money, GDP is the value of (real) gross domesticproduct, and R is the value of the nominal interest rate measured in percent per year. Supposed that β1 = 2.66 and β2 = −0.05. A) What is the expected change in m if GDP increases by 4%? The value of m is expected to_________(increase or decrease ) by approximately ________% (Round your response to the nearest integer) B) What is projected to change in m if the interest rate increases form 2% to 6% ? The value of m is expected to ________(increase/decrease) by approximately ________% (Round your response to the nearest integer)) Derive (again!) the LM curve from considering how income increases affect moneydemanda. Using the attached image as an example, graphically derive the LM curve, using instead a graph that relates money demand to income. Please put the stock of money on the vertical axis and income on the horizontal axis and set this diagram above the LM diagram. b. Please show how the IS curve and the LM curve can be shifted to get an increase in output without a change in interest rates. What kind of mixed monetary and fiscal policy is needed to do this? Will a reduction in interest rates, while holding output constant, do this?
- Money demand curve is downward sloping because as interest rate rises, businesses find it less attractive to borrow for the sake of investment. as interest rate rises, liquidity provided by holding money looses itsattractiveness for households, compared to other financial instruments as means of saving. as interest rate rises, it becomes less attractive for households to hold other financial instruments as means of saving as interest rate rises, households will need less money for their daily transactions.Explain why money is worth more now than in the future, and howthe interest rate represents this relationship.Consider an economy described by the following equations:Y = C + I + G (1)C = 100 + 0.75(Y − T) (2)I = 500 – 50 r (3)G = 125T = 100where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at its natural rate), GDP would be 2,000.1. Suppose the central bank’s policy is to adjust the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. Is it greater or lower than full-employment level? How much 2. Assuming no change in monetary policy (as was in part i), what change in government purchases would restore full employment?1. Assuming no change in fiscal policy, what change in the interest rate would restore full employment?
- Please pleaseee do this Question : For this question assume that the real money demand function is L(R, Y) = kY - hR where k > 0 represents the sensitivity of the money demand to income and h > 0 represents the sensitivity of the money demand to the interest rate. Suppose that these sensitivity parameters are not known for the economy of Macroland and there are two possibilities: it is either i) high k and low h, or ii) low k and high h. To understand which one of these two scenarios is correct you analyze a given policy change: an increase in the overall level of taxes. Using the AA-DD model, compare and contrast the short run effects of this policy change in Macroland under these two scenarios. Explain your results intuitively.Macmilian Learning e. If money demand does not depend on income, the LM curve is horizontal. True False f. Il money demand is extremely sensitive to the interest rate, the LM curve is horizontal. Talsc TrueQ15 Which of the following statements is consistent with a given (i.e., fixed) LM curve? Select one: a. A reduction in the interest rate causes money demand to decrease. b. A reduction in the interest rate causes investment spending to increase. c. An increase in output causes an increase in demand for goods d. An increase in output causes an increase in money demand.
- Consider an economy with a constant nominal money supply, a constant level of real output Y=100, and a constant real interest rate r =0.10. Suppose that the income elasticity of money demand is 0.5 and the interest elasticity of money demand is -0.1. A. By what percentage does the equilibrium price level differ from its initial value if output increases to Y=106 (and r remains a 0.10)? B. By what percentage does the equilibrium price level differ from its initial value if the real interest rate increases to r=0.11 (and Y remains at 100)? C. Suppose that the real interest rate increases to r=0.11. What would real output have to be for the equilibrium price level to remain at its initial value? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.Distinguish between Fisher’s quantity theory and Keynesian’s theory of money.Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000iG = 250 T = 200 i = .05 a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. e. Now suppose that the central bank cuts the interest rate to 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary monetary policy. What is the new equilibrium value of M/P supply? f. Return to the initial situation in which the interest rate set by the central bank is 5%. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary…
