Q.2 Consider the following fixed-price (P-1) IS-LM model Y = C(Yª)+I(r)+G, Yª = Y-ty C=a+byd M=ky-hr M = (-Y) y >0 a. In this model explain the monetary policy of the central bank. b. Draw the phase diagram of the above model in » - Y space | c. Use your graph, trace out the short-run and the long-run effects of an increase in on equilibrium output, rate of interest, and M. Plot the trajectory of Y," and M against time.

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Q.2
Consider the following fixed-price (P=1) IS-LM model
Y = C(Y*)+I(r)+G, Yª = Y - tY
C = a +bY
M = kY – hr
M = y(7 - Y) y > 0
a. In this model explain the monetary policy of the central bank.
b. Draw the phase diagram of the above model in r - Y space|
c. Use your graph, trace out the short-run and the long-run effects of an increase in Y on
equilibrium output, rate of interest, and M. Plot the trajectory of Y,r and M against
time.
Transcribed Image Text:Q.2 Consider the following fixed-price (P=1) IS-LM model Y = C(Y*)+I(r)+G, Yª = Y - tY C = a +bY M = kY – hr M = y(7 - Y) y > 0 a. In this model explain the monetary policy of the central bank. b. Draw the phase diagram of the above model in r - Y space| c. Use your graph, trace out the short-run and the long-run effects of an increase in Y on equilibrium output, rate of interest, and M. Plot the trajectory of Y,r and M against time.
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