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Unformatted text preview: IS LM model is Y = C ( Y, M P ) + I ( r ) + G M /P = L ( Y, r ) Note that the term, M P appears in the consumption function. This what is sometimes referred to as the Real Balances E f ect. (a) Make a sensible assumption about the sign of C/ ( M P ) ? Justifying your assump-tion (only your f rst sentence will be read). (b) Setup and sign the Jacobian of this system. (c) Determine the comparitive static results about how changes in M a f ect Y and r. Use the normal economic assumptions about the derivatives of, I ( r ) and L ( Y, r ) . (d) Redo (c) except this time let P be the exogenous variable that in F uences Y and r (remember to use the chain rule). 1...
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- Spring '09