Answered step by step
Verified Expert Solution
Link Copied!
Question
1 Approved Answer

2. Points = 30. Consider the following national income model (with taxes ignored): Real Sector: Y - C (Y) - I (i) - G0 =

2. Points = 30.

Consider the following national income model (with taxes ignored):

Real Sector: Y - C (Y) - I (i) - G0 = 0 (0

<1; I '

<0)

Money Market: kY + L(i) - Ms0 = 0 (k= positive constant; L '

<0)

Analyze the comparative statics of the model due to monetary and fiscal policies.

1) Check if Implicit Function Theorem applies.

2) Write down the equilibrium identities.

To analyze the effect of monetary policy:

3) Setup the matrix equation assuming that Ms0 is a disequilibrating factor;

4) Take partial derivatives of Y* and i* with respect to Ms0;

5) Determine the signs of partial derivatives in (4);

6) What is the economic interpretation of the signs of partial derivatives in (5)?

To analyze the effect of fiscal policy:

7) Setup the matrix equation assuming that G0 is a disequilibrating factor;

8) Take partial derivatives of Y* and i* with respect to G0;

9) Determine the signs of partial derivatives in (4);

10) What is the economic interpretation of the signs of partial derivatives in (9)?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image
Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Economics Theory and Policy

Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz

9th Edition

978-0132146654, 0132146657, 9780273754091, 978-0273754206

More Books

Students explore these related Economics questions

Question

=+What is the actual exchange rate?

Answered: 3 weeks ago

Question

Discuss the techniques of job analysis.

Answered: 3 weeks ago

Question

Explain the guideline for job description.

Answered: 3 weeks ago