In: Economics

# Please discuss the implications of followings in terms of shape of IS & LM curves and...

Please discuss the implications of followings in terms of shape of IS & LM curves and the impact of fiscal policy (IS shifts) and the monetary policy (LM shifts). (Hint: the shape of IS &LM curves can be evaluated in terms of its intercept and the slope)

i) as the investors become less sensitive to interest rate ?(Hint: Consider the Investment function as I = I0 – b.i, where i is the interest rate and b represents the investors’ sensitivity to interest rate change) ?

ii) as the marginal propensity to consume increases ?

## Solutions

##### Expert Solution

Suppose there is a two sector economy:

C= a+cY

I= I0-bi

Where C is consumption expenditure

I is investment expenditure

a is autonomous consumption

c is Marginal propensity to consume

Y is income

I0 is autonomous investment

b is interest sensivity

i is interest rate

IS curve:

Y=C+I

Y=a+cY+I0-bi

Y-cY=a+I0-bi

Y= (a+I0-bi)/(1-c)

dY/di= -b/(1-c) Slope of IS

i) As the investors become less sensitive to interest rate, it means that due to change in interest rate there will be a very small change in investment as well as income. So it cause IS curve to be more steeper.

Take a extreme condition where b=0 and b= infinity.

In case where b=0 IS will be Vertical(steeper)

So a change in monetary policy does not have any effect on output and fiscal policy is fully effective

In case where b=infinity IS will be horizontal(flatter)

So a change in monetary policy have full impact on output but the effectiveness of fiscal policy decreases

ii) As the marginal propensity to consume increases,it cause IS curve to be more flatter.

In case where MPC=1 IS will be Vertical(steeper)

So a change in monetary policy does not have any effect on output and fiscal policy is fully effective

In case where MPC=0 IS will be horizontal(flatter)

So a change in monetary policy have full impact on output but the effectiveness of fiscal policy decreases

## Related Solutions

##### Discuss the features of IS and LM curves. Is the equilibrium between IS and LM curve...
Discuss the features of IS and LM curves. Is the equilibrium between IS and LM curve curves always stable?
##### Derive and explain the IS and LM curves.
Derive and explain the IS and LM curves.
##### Hello can someone please explain the is lm curves step by step for me?
Hello can someone please explain the is lm curves step by step for me?
##### What is the difference between the LM and IS curves?
What is the difference between the LM and IS curves?
##### A – Using the IS-LM curves explain in detail and show a) how and why the...
A – Using the IS-LM curves explain in detail and show a) how and why the drop in housing prices caused a major financial crisis in 2008, then how the 2008 financial crisis transformed into a major economic crisis and crashed the economy. b) What would have happened if FED employed a set of monetary policies opposite of those we saw during the recession. Discuss their impact on the economy, output, interest rates, and consumption and investment expenditures. c) What...
##### Discuss the impact of different shape of microstrip in terms of resonance frequency, polarization, impedance and...
Discuss the impact of different shape of microstrip in terms of resonance frequency, polarization, impedance and radiation pattern.
##### What shape heating and cooling curves suppose to have?
What shape heating and cooling curves suppose to have?
##### In terms of debt instruments, distinguish between the primary and secondary market and discuss the implications...
In terms of debt instruments, distinguish between the primary and secondary market and discuss the implications for liquidity if an instrument is not tradable on the secondary market?
##### 1) Analyze and explain the IS* and LM * curves in the small open economy under...
1) Analyze and explain the IS* and LM * curves in the small open economy under the fixed and flexible ( floating ) exchange -rate system. Explain in detail the assumptions of the Mundell-Fleming Model, its limitations, and explain what occurs to the models variables as the economy moves from the short term ( when price is fixed) to the long term ( when price is flexible). Include diagrams of the appropriate economic models in your answer.
##### Discuss the shape of a protein and how this dictates function. Please explain in depth.
Discuss the shape of a protein and how this dictates function. Please explain in depth.