Answer to Question #95716 in Macroeconomics for Sabreen Rehana Nisha

Question

PS Note: Am in particular after the solutions to part e and f


The following equations describe a small open economy.
[Figures are in millions of dollars; interest rate (i) is in percent]. Assume that the price level is fixed.

Goods Market Money Market
C = 250 + 0.8YD L = 0.25Y – 62.5i
YD = Y + TR – T Ms/P = 250
T = 100 + 0.25Y
I = 300 – 50i
G = 350; TR = 150

Goods market equilibrium condition: Y = C + I + G + X-M
Money market equilibrium condition: L = Ms/P

a) If you were your Reserve Bank advisor, what would you recommend the Reserve Bank to do to keep the interest rate constant?
b) Show the impact of the above d) and e) on the IS-LM framework. Would the IS curve now relatively flatter or steeper and why?

Answer 1

a) As a Reserve Bank advisor you should recommend the Reserve Bank to make open market purchase or sale to keep the interest rate constant.

b) To find out the impact of the d) and e) on the IS-LM framework, we need to know the changes that occurred in d and e.