1. Consider the following equations for a small open economy for both the goods and money markets. Goods Market: C = 2000 + 0.8Yd; T = 1000 + 0.3Y; G = 6000; TR = 1500; I = 4000 + 0.24Y – 40r; X = 2000. M = 3000 + 0.2Y. Money Market: LP = 1500 + 0.15Y; LT = 2500 + 0.25Y – 15r; Ls = 1000 – 25r; MS = 50,000; P= 4 a). Derive both the IS and LM equations for the economy and compute the Equilibrium level of Income and Interest Rate. b). Suppose the government undertook an expansionary fiscal policy by increasing government expenditure by 10 percent and cutting lump s
Monetary Policy and Equation of Exchange
The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.
Monetary Economics
As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.
1. Consider the following equations for a small open economy for both the goods and money markets.
Goods Market:
C = 2000 + 0.8Yd; T = 1000 + 0.3Y; G = 6000; TR = 1500; I = 4000 + 0.24Y – 40r; X = 2000.
M = 3000 + 0.2Y.
LP = 1500 + 0.15Y; LT = 2500 + 0.25Y – 15r; Ls = 1000 – 25r; MS = 50,000; P= 4
a). Derive both the IS and LM equations for the economy and compute the Equilibrium level of Income and Interest Rate.
b). Suppose the government undertook an expansionary fiscal policy by increasing government expenditure by 10 percent and cutting lump sum tax by 20%. Clearly demonstrate how this would result in the crowding out phenomena, using the IS – LM model.
c). Ceteris paribus suppose the government instead decided to increase money supply by 30%, which sees the price level go up by 25 percent. Using the IS-LM model, show how this policy results in the crowding in phenomena.
d). Suppose now the policy makers advocate for a policy mix, clearly explain how this is a better option than opposed to only applying monetary or fiscal policies independently.
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