Consider the following IS-LM model in a closed economy: C = 335 + 0.3YD I =...

Consider the following IS-LM model in a closed economy:

C = 335 + 0.3YD

I = 130 + 0.15Y − 850i

G = 350

T = 245

i = 0.04

M/P = 3.6Y − 9,250i

a. Suppose Government increased the taxes. Show the impact of this policy on IS-LM graph in Short-Run. Be explicit about the assumptions you make (which variables do not change in IS-LM relation in Short Run, which ones increase/decrease). You do not need to show exact numbers on graph, symbols are enough

b. Suppose now we are in Medium Run and the Central Bank applies an ’expansionary monetary policy’. Show the impact of this policy on IS-LM graph (not money supply money demand graph). Explain which variables in the model does not change/increases/ decreases. Explain the steps leading to these consequences. You do not need to show exact numbers on graph, symbols are enough

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Expert Solution

Rahul Sunny answered 2 years ago

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