Describe the current state of the economy

Reference no: EM132196773

Question: The information below describes the current state of the economy for the Kingdom of Westeros. All coefficients (e.g. m0) represent positive constants, and c is bounded between 0 and 1. Assume that inflation is equal to zero.

Real money demand: L(r, Y) = m0 + kY - hr

Real money supply: M/P= z0

Consumption:C= C0 = C(Y-1)

Government spending: G

Investment demand: I= I0 -br

a. Derive an expression for the LM curve for Westeros. What is the slope of the LM curve? Is it positive or negative?

b. Derive an expression for the IS curve for Westeros. What is the slope of the IS curve? Is it positive or negative?

c. Suppose that there is a balanced budget rule in place in the Kingdom such that Î"G = Î"T (i.e. any increase in spending by Queen Cersei Lannister for war or otherwise must be accompanied by an increase in tax). Would the Kingdom's output change in response to an increase in government spending? If so, by how much (derive an explicit algebraic expression here)?

Reference no: EM132196773

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