Answer to Question #153898 in Macroeconomics for y99

Question

Assume that there is economy with increasing of government expenditure and interest rate and aggregate price level are endogenous. Please use graph to show the increasing by using:

b) IS-LM model

c) AD-AS model with the horizontal aggregate supply curve in the short run

(assume both cases initially started from natural level of income)

Answer 1

a). IS-LM model.

b). AD-AS model showing an economy with increasing government expenditure and interest rate, with Y_1 representing expenditure and Y_f representing interest rate. Note that Y_1 is greater than Y_f when an economy expenditure is increasing more than the interest rate.