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What happens when the expected inflation rate enters the IS-LM model?

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

Consider the AD-AS framework suppose gov't spending is increased when we are in a liquidity trap and the FED does not target the IR.. assume expected inflation is always zero

1. show what happens in an IS-LM and AD-AS graph in the period Gov't spending increases, and output ends up above potential GDP and out of a liquidity trap. Then show what happens to output, the PL, and IR over time

Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, real interest rate, consumption, investment, and price level.

(a) A reduction in the effective tax rate on capital increases desired investment.

(b) The expected rate of inflation rises.

1. The Response of investment to fiscal policy

1a. Using the IS-LM diagram, show the effects on output and the interest rate of a decrease in government spending. Can you tell whay happens to investment? Why?

Now consider the following IS-LM model:

C=c0+c1(Y-T)

I=b0+b1Y-b2i

M/P=d1Y-d2i

1b. Solve for equilibrium output. Assume c1+b1<1

1c. Solve for the equilibrium interest rate.

1d. Solve for investment.

1e. Under waht conditions on the parameters of the model will investment increase when G decreases?

1f. Explain the condition you derived in part e.

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