Y=C(Y)+I(r)+G, Yd = Y-ty C=a+byd M = ky-hr P P = y(Y-Y), y >0 a. In the above model if P is an endogenous then P will be exogenous. In contrast if P is endogenous then P=0. True/false? Explain your answer. b. Plot the phase diagram of the above model in - Y space | c. Use your graph, trace out the short-run and the long-run effect of an increase in marginal propensity to consume (b) on equilibrium output, money supply, and the price level when central bank follows a fixed real money (M/P) policy. Plot the trajectory of Y,M and P against time.
Y=C(Y)+I(r)+G, Yd = Y-ty C=a+byd M = ky-hr P P = y(Y-Y), y >0 a. In the above model if P is an endogenous then P will be exogenous. In contrast if P is endogenous then P=0. True/false? Explain your answer. b. Plot the phase diagram of the above model in - Y space | c. Use your graph, trace out the short-run and the long-run effect of an increase in marginal propensity to consume (b) on equilibrium output, money supply, and the price level when central bank follows a fixed real money (M/P) policy. Plot the trajectory of Y,M and P against time.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Q.1
Consider the following IS-LM model
Y = C(r*)+I(r)+G, Y = Y - tY
C = a +bY°
M
= kY – hr
P
P = y(Y – F), y >0
a. In the above model if P is an endogenous then P will be exogenous. In contrast if P
is endogenous then P= 0. True/false? Explain your answer.
b. Plot the phase diagram of the above model in r - Y space|
c. Use your graph, trace out the short-run and the long-run effect of an increase in marginal
propensity to consume (b) on equilibrium output, money supply, and the price level when
central bank follows a fixed real money (M/P) policy. Plot the trajectory of Y,M and
P against time.
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