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Additional Exercise with IS - LM
Consider the following model of a closed economy, where we have the following demands of consumption and investment:
C=c0+c1YD
I=b0-b2i
where Y is GDP, C is consumption, YDis disposable income, i is the saki rate, I is gross domestic investment. Assume Taxes are unbending at T0, and assume government spending (G=g0) to be exogenous.
It is accommodating to define a autonomous expenditure, A, as:
A=c0+b0+g0-c1T
bills supply is fixed (Ms = M). Money demand is given by:
Md=m0+m1Y-m2i

1. keep open down the equation of the IS curve, solving it for i.
think of substitute all the exogenous expenditure terms for A. switch over YD=Y-T.
i = _______________________________________________. What does the IS curve represent?______________________________________. The slope of the IS equation is _______________.

2. Write down the equation of the LM curve, solving it for i.
i = ______________________________________________. What does the LM curve represent?_____________________________________________________.
The slope of the LM equation is _______________.

3.



lap up for equilibrium sidetrack in this economy by combination the IS and LM equations (using the fact that the interest rates that are self-consistent with equilibrium in both markets mustiness be advert in IS-LM equilibrium).
YN=
Lets call this a convention year (youll understand why below). Call this level of output you have solved for YN. Using algebra or economics, what happens to YN after an plus in the money supply, M? ______________.
Lets adjudicate the mechanism by which this happens. A minute after M rises, the money market finds itself in disequilibrium. To restore equilibrium, the ________________ must fall. The causality is that now there is more money in the economy, and individuals must be encouraged to hold money rather than ________, which is the other asset we consider as a repository of wealth. This causes an affix in ______________, which is a component of aggregate...If you want to get a full essay, order it on our website: Orderessay



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