Consider the following data about the goods market in a hypothetical closed economy. Assume that government expenditure is constant at $200 million. Also assume that there is equilibrium in the goods market at all times.
Some of the pairs of interest rate and aggregate output that determine equilibrium in the MONEY market include: 2% and $300 million, 4% and $500 million, 6% and $700 million, and 8% and $900 million. Which of the following is NOT consistent with the available data?
A. Both the goods market and the money market have an equilibrium aggregate output of $700 million.
B. There is a positive relationship between interest rates and aggregate output in the money market; the opposite is true in the goods market.
C. Based on the available data, we cannot calculate the equilibrium in the IS-LM diagram.
D. The equilibrium interest rate in the IS-LM diagram is 6%.
I beleive the answer is A butsince ther is no way of telling the equilibrium, am I correct?
Based on the given data, the correct answer is C.
Option A cannot be determined since the equilibrium aggregate output is not given for the goods market. We only have pairs of interest rates and aggregate output for the money market.
Option B is consistent with the given data. It is stated that there is a positive relationship between interest rates and aggregate output in the money market, and the opposite is true in the goods market.
Option C is correct. Without additional information about the goods market and the relationship between the goods market and the money market, we cannot determine the equilibrium in the IS-LM diagram.
Option D cannot be determined based on the given data. The equilibrium interest rate in the IS-LM diagram is not provided.
Based on the information provided, let's analyze each statement and determine if it is consistent with the available data.
A. Both the goods market and the money market have an equilibrium aggregate output of $700 million.
From the given data, we can see that an interest rate of 6% corresponds with an aggregate output of $700 million. Therefore, statement A is consistent with the available data.
B. There is a positive relationship between interest rates and aggregate output in the money market; the opposite is true in the goods market.
Based on the data, we can see that as the interest rate increases, the aggregate output also increases. This is true for both the money market and goods market. Therefore, statement B is consistent with the available data.
C. Based on the available data, we cannot calculate the equilibrium in the IS-LM diagram.
The IS-LM diagram is used to depict the relationship between interest rates and aggregate output in both the goods market (IS curve) and the money market (LM curve). Since we have a set of interest rate and aggregate output pairs, we can plot these points on the diagram and determine the equilibrium. Therefore, statement C is incorrect. We can calculate the equilibrium in the IS-LM diagram based on the available data.
D. The equilibrium interest rate in the IS-LM diagram is 6%.
From the available data, we can see that when the aggregate output is $700 million, the corresponding interest rate is indeed 6%. Therefore, statement D is consistent with the available data.
In conclusion, the statement that is NOT consistent with the available data is C. We can calculate the equilibrium in the IS-LM diagram based on the given information.