Assume the following: i. The public holds no currency. ii. The ratio of reserves to deposits (0) is 0.05. ii. The demand for money is given by M = $Y(0.84-3.81). Initially, the monetary base (H) is $83 billion, and nominal income (SY) is $4,900 billion. Calculate the demand function for central bank money: H²=0x0×0 Find the equilibrium interest rate by setting the demand for central bank money (H) equal to the supply of central bank money (H). The equilibrium interest rate is%. (Round your response to two decimal places.)
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
