Consider the closed-economy model of the money market in which, the demand for real balances depends negatively on the nominal interest rate (i), and positively on disposable income (Y-T). That is, the money market is characterized by M = L(i,Y -T). Suppose tax revenues, T, are such that T= T(Y), T'(Y) > 0, so that the goods market is characterized by Y = E(r,i-n",G,T(Y). What is the effect of an increase in T on i for a given level of P? Derive an expression for this effect and state the requisite assumptions to support the sign of your answer.

Consider the closed-economy model of the money market in which, the demand for real balances depends negatively on the nominal interest rate (i), and positively on disposable income (Y-T). That is, the money market is characterized by M = L(i,Y -T). Suppose tax revenues, T, are such that T= T(Y), T'(Y) > 0, so that the goods market is characterized by Y = E(r,i-n",G,T(Y). What is the effect of an increase in T on i for a given level of P? Derive an expression for this effect and state the requisite assumptions to support the sign of your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider the closed-economy model of the money market in which, the demand for real
balances depends negatively on the nominal interest rate (i), and positively on disposable
income (Y-T). That is, the money market is characterized by
M
= L(i,Y -T).
Suppose tax revenues, T, are such that T= T(Y), T'(Y) > 0, so that the goods market is
characterized by
Y = E(r,i-n",G,T(Y).
What is the effect of an increase in T on i for a given level of P?
Derive an expression for this effect and state the requisite assumptions to support the sign
of your answer.

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