Consider a closed macroeconomy with demand side and , where are positive constants and . Suppose the government follows an interest-rate-targeting policy, supplying whatever money is demanded so as to keep the interest rate fixed at . The AD curve for this economy is
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Consider a closed macroeconomy with demand side Y = C₀ + c(Y - τ Y) - α r + G₀ and M₀ = KPY - β r, where C₀, G₀, M₀, K, c, τ, α, β are positive constants and c, τ ∈ (0,1). Suppose the government follows an interest-rate-targeting policy, supplying whatever money is demanded so as to keep the interest rate fixed at r₀. The AD curve for this economy is (A) Y = (C₀ - α r₀ + G₀)/(1 - c(1-τ)) (B) Y = (C₀ + M₀ + G₀)/(1 - c(1-τ) + KP) (C) Y = (C₀ + M₀ + G₀)/(1 - c(1-τ) + 1/βKP) (D) Y = (C₀ + α/βM₀ + G₀)/(1 - c(1-τ) + α/βKP)
Also written as: Consider a closed macroeconomy with demand side Y = C_0 + c(Y - tau Y) - alpha r + G_0 and M_0 = KPY - beta r, where C_0, G_0, M_0, K, c, tau, alpha, beta are positive constants and c, tau in (0,1). Suppose the government follows an interest-rate-targeting policy, supplying whatever money is demanded so as to keep the interest rate fixed at r_0. The AD curve for this economy is
IS-LM model has come up 137 times in 7 exams since 2004.
This question is on Extensions: expected inflation, endogenous money and rate targeting, part of IS-LM model in Macroeconomics.
Variations on the basic model: inflation expectations, money supply that responds, and central banks that target the rate.
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Question from the DSE 2018 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.