Suppose that in Macroland the consumption and the investment have a negative relationship with the real interest rate and positive relationship with Y. The Central Bank of the country targets a certain nominal interest rate and lets the money supply adjust in order to reach that interest rate. a. Draw a graph of the IS-LM model in this situation. b. Suppose that the Central Bank announces an increase of the interest rate in the future. Represent graphically the initial position of IS-LM curves. Then, show the IS-LM curves of the future, after the announced increase in the interest rate is implemented. (Assume that the IS is constant.). c. Suppose that agents today take into consideration the resulting income of the future when deciding the amount of consumption and investment. Show what happens to the IS-LM curves today after the announcement of the CB (tip: the CB is NOT increasing the nominal interest rate today). d. The government decides to step in and avoid any deviation of Y from the initial equilibrium. What should the government do? Describe the change in the composition of the GDP after both the monetary and the fiscal policy has been implemented in the country
Suppose that in Macroland the consumption and the investment have a negative relationship with
the real interest rate and positive relationship with Y. The Central Bank of the country targets a
certain nominal interest rate and lets the money supply adjust in order to reach that interest rate.
a. Draw a graph of the IS-LM model in this situation.
b. Suppose that the Central Bank announces an increase of the interest rate in the future.
Represent graphically the initial position of IS-LM
future, after the announced increase in the interest rate is implemented. (Assume that the IS
is constant.).
c. Suppose that agents today take into consideration the resulting income of the future when
deciding the amount of consumption and investment. Show what happens to the IS-LM
curves today after the announcement of the CB (tip: the CB is NOT increasing the nominal
interest rate today).
d. The government decides to step in and avoid any deviation of Y from the initial equilibrium.
What should the government do? Describe the change in the composition of the
both the monetary and the fiscal policy has been implemented in the country.
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