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Questions › DSE › DSE 2004 › Q18
2 marks, −1Macroeconomics › IS-LM model › Monetary policy and the liquidity trap in IS-LMHardabout 4 min

DSE 2004 Question 18: IS-LM model

Suppose YYY is aggregate real income, rrr the real interest rate, MMM the exogenous nominal money stock, PPP the price level and GGG real government expenditure. Consumption demand is cY+βM/PcY+\beta M/PcY+βM/P and investment demand is α/r\alpha/rα/r. Transactions demand for money is λY\lambda YλY and speculative demand is μ/r\mu/rμ/r. YYY and rrr are endogenous; c∈(0,1)c\in(0,1)c∈(0,1), β,α,λ,μ>0\beta,\alpha,\lambda,\mu>0β,α,λ,μ>0 are parameters. The rate of change of aggregate demand with respect to expansionary monetary policy is

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Suppose Y is aggregate real income, r the real interest rate, M the exogenous nominal money stock, P the price level and G real government expenditure. Consumption demand is cY+β M/P and investment demand is α/r. Transactions demand for money is λ Y and speculative demand is μ/r. Y and r are endogenous; c∈(0,1), β,α,λ,μ>0 are parameters. The rate of change of aggregate demand with respect to expansionary monetary policy is (A) (μβ + α)/P[(1 - c) + αλ] (B) (μβ + α)/P[μ(1 - c) + αλ] (C) (β + α)/P[μ(1 - c) + αλ] (D) (μβ + α)/P[(1 - c) + αλ]

Also written as: Suppose Y is aggregate real income, r the real interest rate, M the exogenous nominal money stock, P the price level and G real government expenditure. Consumption demand is cY+beta M/P and investment demand is alpha/r. Transactions demand for money is lambda Y and speculative demand is mu/r. Y and r are endogenous; c in (0,1), beta,alpha,lambda,mu>0 are parameters. The rate of change of aggregate demand with respect to expansionary monetary policy is

IS-LM model has come up 137 times in 7 exams since 2004.

What this question tests

This question is on Monetary policy and the liquidity trap in IS-LM, part of IS-LM model in Macroeconomics.

How money supply changes work, and the classical and liquidity-trap extremes.

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