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Consider the typical IS-LM set-up from Chapter 5 with one simplification that consumption depends only on disposable income, but not interest rate. Thus, the IS
Consider the typical IS-LM set-up from Chapter 5 with one simplification that consumption depends only on disposable income, but not interest rate. Thus, the IS relation is given by:
Z=f^c(Y-T)+f^I(Y,i)+G=Y
LM relationship is given by: (M^s/P)=Y*L(i)
Suppose the government and the central bank pursue a policy mix consisting of expansionary monetary policy and expansionary fiscal policy. Explain what the IS-LM model predicts will happen to consumptions.
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