Suppose in a closed economy with no government expenditure and taxation the investment function is given by and the saving function is given by ( denotes aggregate income and the nominal rate of interest). The economy is subject to a liquidity trap at . What is the maximum equilibrium value of possible in this economy?
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Suppose in a closed economy with no government expenditure and taxation the investment function is given by I = 2000 + 0· 1Y - 8000r and the saving function is given by S = 1000 + 0· 2Y + 2000r (Y denotes aggregate income and r the nominal rate of interest). The economy is subject to a liquidity trap at r = 0· 01. What is the maximum equilibrium value of Y possible in this economy? (A) 7800 (B) 9000 (C) 11000 (D) None of the above
Also written as: Suppose in a closed economy with no government expenditure and taxation the investment function is given by I = 2000 + 0* 1Y - 8000r and the saving function is given by S = 1000 + 0* 2Y + 2000r (Y denotes aggregate income and r the nominal rate of interest). The economy is subject to a liquidity trap at r = 0* 01. What is the maximum equilibrium value of Y possible in this economy?
IS-LM model has come up 137 times in 7 exams since 2004.
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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Question from the JNU SSS 2011 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.