2. Suppose an open economy is described in the short run by the following standard IS-LM model: IS-curve (goods market e

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2 Suppose An Open Economy Is Described In The Short Run By The Following Standard Is Lm Model Is Curve Goods Market E 1 (32.53 KiB) Viewed 49 times

2. Suppose an open economy is described in the short run by the following standard IS-LM model: IS-curve (goods market equilibrium condition): a+e+g+G_1-b(1-1) +my with 0<b<1 and 0<t<1 R= n+d n+d LM-curve (money market equilibrium condition): M k R=- +=Y hP h M is the money supply, G is government spending, P is the price level. The remaining parameters a, e, g, n, d, m. k, h are all positive. An expansionary monetary policy. (a) decreases the equilibrium output Y. (b) reduces the investment demand. (c) is more effective (in terms of output changes), if there is a higher tax rate t. (d) is more effective (in terms of output changes), if consumers have a lower propensity to consume (low b). (e) is more effective (in terms of output changes), if investment demand is more sensitive to interest rate changes (high d).