econ hw #13

# econ hw #13 - BOCHI LIU ECON 100B PROBLEM SET#13 SECTION...

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BOCHI LIU ECON 100B PROBLEM SET #13 SECTION 112 2.The IS-LM model shows general equilibrium in the goods, assets, and labor markets. The real interest rate R is on the vertical axis, and output Y is on the horizontal axis. The full employment line FE is vertical at full employment level output. Full employment output Y is the level of output that firms supply when wages and prices have fully adjusted, so employment is at its full employment level. Since Y=AF(K,N), and it's not related with r, the FE line is vertical. For any level of output Y, the IS curve gives the real interest rate r that clears the goods market, means desired saving equals to desired investment. Because output raises desired saving and lowers the real interest rate that clears the goods market, the IS curve slopes downward. For any level of output Y, the LM curve gives the real interest rate that clears the assets market, means the real money demand equals to the real money supply. Because an increase in income raises real money demand, and raises the real interest rate, so the LM curve slopes upward.

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