Question 4: Stability of the IS-LM model Consider the following short-run dynamics in the closed-economy IS-LM model. It is assumed that the price level is fixed and (for convenience) has been normalized to unity (P = 1): R = $₁ [1(Y, R) – M], $1 > 0, Ý = $₂ [C(Y — T) + I(R) + G_Y], $₂ > 0₁ where Y is output, R is the interest rate, M is the money stock, C is consumption, T is taxes, I is investment, and G is government consumption. As usual, a dot above a variables denotes that variable's time rate of change, i.e. R= dR/dt and Y = dy/dt. (a) Interpret these equations. (b) Can you say something about the relative speeds of adjustment in the goods and financial markets?

Question 4: Stability of the IS-LM model Consider the following short-run dynamics in the closed-economy IS-LM model. It is assumed that the price level is fixed and (for convenience) has been normalized to unity (P = 1): R = $₁ [1(Y, R) – M], $1 > 0, Ý = $₂ [C(Y — T) + I(R) + G_Y], $₂ > 0₁ where Y is output, R is the interest rate, M is the money stock, C is consumption, T is taxes, I is investment, and G is government consumption. As usual, a dot above a variables denotes that variable's time rate of change, i.e. R= dR/dt and Y = dy/dt. (a) Interpret these equations. (b) Can you say something about the relative speeds of adjustment in the goods and financial markets?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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