Search for notes by fellow students, in your own course and all over the country.
Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.
Title: Consider the following IS-LM model in which both equations represent equilibrium conditions
Description: Consider the following IS-LM model in which both equations represent equilibrium conditions Y – C(Y) – I(i) – G0 = 0 (0 < C’ < 1; I’ < 0) kY + L(i) – Ms0 = 0 (k = positive constant; L’ <0) (a) Briefly interpret the components of the LM equation. (b) Write the Jacobian determinant. (c) Use comparative statics to analyse the effects of an increase in G0 (expansionary fiscal policy) vs. an increase in Ms0 (expansionary monetary policy).
Description: Consider the following IS-LM model in which both equations represent equilibrium conditions Y – C(Y) – I(i) – G0 = 0 (0 < C’ < 1; I’ < 0) kY + L(i) – Ms0 = 0 (k = positive constant; L’ <0) (a) Briefly interpret the components of the LM equation. (b) Write the Jacobian determinant. (c) Use comparative statics to analyse the effects of an increase in G0 (expansionary fiscal policy) vs. an increase in Ms0 (expansionary monetary policy).
Document Preview
Extracts from the notes are below, to see the PDF you'll receive please use the links above
Tutorial 4
1
...
Write the Jacobian determinant
...
an increase in Ms0 (expansionary monetary policy)
...
Ms0 is the
exogenously determined money supply
...
The implicit function theorem applies (or using the general approach) and
we have the identities:
(c)
Y* - C(Y*) – I(i*) – G0 ≡ 0
kY* + L(i*) – Ms0 ≡ 0
For fiscal policy:
1- C’
-I’
∂Y*/∂G0
1
=
k
L’
∂i*/∂G0
0
which gives:
This study source was downloaded by 100000795743069 from CourseHero
...
coursehero
...
Then:
∂Y*/∂M0 = I’/|J| > 0 and ∂i*/∂M0 = (1 – C’) /|J| < 0
...
In the previous question assume now that the demand for money is no longer
dependent on the interest rate (while still depends on Y)
...
(a) Write the revised model
...
Is the new J-determinant larger or
smaller in absolute value compared to the one in the previous question?
(c) Find the new comparative statics results
...
(b)
1-C’
-I’
|J|’ =
= kI’
k
0
which is numerically smaller
...
Thus, fiscal policy becomes totally
ineffective in the changed model
...
com on 05-27-2022 03:06:44 GMT -05:00
https://www
...
com/file/34072216/Tut4-Answersdocx/
And: ∂Y*/∂Ms0 = I’/|J|’ > 0 and ∂i*/∂Ms0 = (1 – C’)/|J|’ < 0
...
(d) Fiscal policy becomes totally ineffective, while monetary policy not only
remains effective, but it is now even more effective (note that the new
Jacobian id numerically smaller than the initial one)
...
Given:
Y - c(Y-T) - I(r) - G = 0
M/P - L(Y, r) = 0
Derive the effect of a change in T
...
-c’
-I’
1
L2
∂Y/∂T = -----------------(1-c’)
-I’
L1
4
...
com on 05-27-2022 03:06:44 GMT -05:00
https://www
...
com/file/34072216/Tut4-Answersdocx/
Y = 0
...
25Y – 30r
Y = 1000L1/2
500/L1/2 = 62
...
(a)
(b)
Derive, determine the sign and interpret the derivatives: dY/dG, dY/dr
...
Comment on your results
...
On the other hand, dr/dG > 0
(total crowding out effect)
...
8(∂Y/∂G) + 20(∂r/∂G)
-M/P2(∂P/∂G) -0
...
5)(∂L/∂G)
1/P(∂W/∂G) –W/P2(∂P/∂G) + 250L-3/2(∂L/∂G)
=1
=0
=0
=0
=0
0
...
25
30
-M/P2
0
0
∂r/∂G
0
1
0
0
-500L-1/2
0
∂P/∂G
0
0
0
-(250L-3/2 + 62
...
com on 05-27-2022 03:06:44 GMT -05:00
https://www
...
com/file/34072216/Tut4-Answersdocx/
0
1
20
0
0
30
-M/P2
0
0
0
0
0
0
0
0
0
0
0
0
-500L-1/2
0
-(250L-3/2 + 62
...
= 0
0
1/P
(b) Solving the system of equations, given the values of the exogenous variables
results in the following equilibrium values: Y=2000; r=5%, L = 4; P=1;and
W=250
...
Then, from the IS, r = 5%; From the LM, P = 1
...
(c) The results in (a) are expected since we have a classical model, with supply
of labour depending on the real wage rate (as is the demand for labour)
...
5
...
com on 05-27-2022 03:06:44 GMT -05:00
https://www
...
com/file/34072216/Tut4-Answersdocx/
>0
Answer
(1-c’)∂Y/∂G - I’(∂r/∂G)
=1
L1(∂Y/∂G) + L2(∂r/∂G) + M/P2(∂P/∂G)
=0
∂Y/∂G
-Y’(∂L/∂G)
=0
φ(∂P/∂G) + (P’φ – ψ’)(∂L/∂G)
-W/P2(∂P/∂G)
(1 – c’)
-I’
L1
- φ’(∂L/∂G)
=0
+ 1/P(∂W/∂G) = 0
0
0
0
∂Y/∂G
1
L2
M/P2
0
0
∂r/∂G
0
1
0
0
-Y’
0
∂P/∂G
0
0
φ
0
∂L/∂G
0
0
0
1/P
∂W/∂G
0
(Pφ’ – ψ’)
-W/P2
-φ’
=
0
The numerator determinant is:
1
-I’
0
0
0
L2
M/P2
0
0
0
-Y’
0
0
0
φ
(Pφ’ – ψ’)
0
0
0
-φ’
1/P
-W/P2
0
0
0
= L2Y’φ/P
The denominator determinant is:
(1 – c’)
-I’
L1
L2
1
0
0
M/P2
0
0
0
0
0
-Y’
0
= (1-c’)L2φY’/P + L1I’φY’/P - I’M(Pφ’ – ψ’)/P3
This study source was downloaded by 100000795743069 from CourseHero
...
coursehero
...
Consider the following open economy macroeconomic model:
Y = C(Y) + I(r) + X(e) + G
(IS curve)
L(Y, r) = M
(LM curve)
X(e) + F(r) = 0 (balance of payments)
with 0 < C’ < 1, X’, Ly, F’ > 0, I’, Lr < 0
...
The exchange rate is the price of foreign currency in terms of
the domestic currency; thus, an increase in e signifies a depreciation of the
domestic currency
...
Analyse the effects of an expansionary monetary policy (increase in M
holding G constant) on the three endogenous variables Y, r and e
...
Answer
(a) Differentiating the system with respect to M, we have:
∂Y/∂M – C’∂Y/∂M - I’∂r/∂M – X’∂e/∂M = 0
Ly∂Y/∂M + Lr∂r/∂M
=1
X’∂e/∂M + F’∂r/∂M
=0
This study source was downloaded by 100000795743069 from CourseHero
...
coursehero
...
Therefore:
∂Y/∂M = (I’X’ – F’X’) /Δ > 0
∂r/∂M= [X’(1 – C’)]/ Δ < 0
∂e/∂M = [-(1 – C’)]/ Δ > 0
So, monetary policy in this model increases national income by decreasing the
interest rate in the money market
...
This study source was downloaded by 100000795743069 from CourseHero
...
coursehero
...
tcpdf
Title: Consider the following IS-LM model in which both equations represent equilibrium conditions
Description: Consider the following IS-LM model in which both equations represent equilibrium conditions Y – C(Y) – I(i) – G0 = 0 (0 < C’ < 1; I’ < 0) kY + L(i) – Ms0 = 0 (k = positive constant; L’ <0) (a) Briefly interpret the components of the LM equation. (b) Write the Jacobian determinant. (c) Use comparative statics to analyse the effects of an increase in G0 (expansionary fiscal policy) vs. an increase in Ms0 (expansionary monetary policy).
Description: Consider the following IS-LM model in which both equations represent equilibrium conditions Y – C(Y) – I(i) – G0 = 0 (0 < C’ < 1; I’ < 0) kY + L(i) – Ms0 = 0 (k = positive constant; L’ <0) (a) Briefly interpret the components of the LM equation. (b) Write the Jacobian determinant. (c) Use comparative statics to analyse the effects of an increase in G0 (expansionary fiscal policy) vs. an increase in Ms0 (expansionary monetary policy).