Post a New Question

Econ

posted by .

Assume that initially the IS curve is given by IS1: Y = 12-1.5T-30i+2G, and that the price level P is
1, and the LM curve is given by LM1: M= Y(1-i). Initially, the home interest rate equals the foreign interest rate of 10% or 0.1. Taxes and
government spending both equal 2.
-I found the output is 10 (this is the desired output)

There is now a foreign demand shock, such that the IS curve shifts left by 1.5 units at all levels of the
interest rate, and the new IS curve is given by IS2: Y = 10.5-1.5T-30i+2G.

Assume that the central bank refuses to change the interest rate from 10%. In this case, what is the new level of output? What is the money supply? And if the government decides to use fiscal policy instead to stabilize output (to desired output=10), then, according to the new IS curve, by how much must government spending be increased to achieve this goal?


I don't get the part where it says assume central refuses to change interest from 10%, but when your IS curve shifts, won't interest decrease?

  • Econ -

    I don't get it either unless you can assume that the central bank views a 10% interest rate as "da bomb" and will always take action to keep the interest rate at 10%. In which case, you could solve these problems with simple algebra and plug in 0.1 for i.

Answer This Question

First Name
School Subject
Your Answer

Related Questions

More Related Questions

Post a New Question