Answer to Question #309724 in Macroeconomics for Jackey

Question

Refer to the IS-LM-BP model for an open economy

1. Draw a diagram that typically illustrates the IS-LM-BP model, with the slope of the BP curve flatter than that of the LM curve. Label the axes properly and reflect equilibrium.
2. How was the LM curve derived and defined, what does the slope of the curve depend on and what changes in what variables will shift the curve to the right?
3. How was the I|S curve derived and defined, what does the slope of the curve depend on and what changes in what variables will shift to the curve?
4. What does the BP curve reflect and what do points on, below and above the BP curve indicate?

Answer 1

1)

2)

LM curve is derived from the Keynesian theory from its analysis of money market equilibrium.

The LM curve slopes upwards towards the right. It is flatter if the interest elasticity of demand for money is high.

3)

IS curve is derived from the interaction between the goods and money market. Here, the aggregate demand is determined by consumption demand and investment demand.

4)

The BP curve shows the combinations of production and interest rates that guarantee that the balance of payment is viably financed. The volume of net exports which affect the total production should be consistent with the volume of net capital outflows.