Determining the lm curve, Macroeconomics

This problem revolves around determining the LM curve, as we did earlier in the term such that money demand (MD) equals money supply (MS), however in this instance under differing conditions of the interest elasticity of money demand.  Suppose that money demand is given by:

MD = [YF/2Ro]½

Where Y is income, F is the transactions cost, and Ro is the opportunity cost of holding money.  Assume that Ro is given as:

Ro = q1R - q0

In the equation above, R is the market interest rate and q1 and q0 are interest elasticity parameters in the opportunity cost of holding money expression.

a.  Assume F = 2 and the parameters q1 = 1 and q0 = 0.06 initially.  What is the level of money demand, MD if Y = 2,500 and R = 0.08?  (Hint:  Start with the Ro expression first, and then MD). 

b.  Next, as we know in the determination of the LM curve (MS = MD), suppose that money supply is set equal to the value of MD found in (a) to insure this equality.  Now find the two market interest rates (R1 and R2) at which money supply (MS) equals money demand (MD) when

Y = 1,000 and Y = 4,000.  Plot (roughly sketch) what this LM curve would look like graphically (call this LM1).

c.  With F = 2 but assuming that the interest elasticity parameters of money demand change such

that q1 = 0.25 and q0 = 0, repeat the process from above.  Specifically, find the level of money demand (MD) when Y = 2,500 and R = 0.08 (beginning with Ro).  Similarly, supposing that money supply is set equal to this value of MD, find the market interest rates (R) for the values of Y = 1,000 and Y = 4,000 as you did in part (b), and then plot (roughly sketch) what this LM curve would look like graphically in the same quadrant (call this LM2).

d.  For which values of q1 and q0 will the LM curve be steeper?  Explain (or provide) a brief economic interpretation.  How might the effectiveness of fiscal policy (i.e., ?IS) be impacted by these differing LM curves?  Briefly explain.    

Posted Date: 2/21/2013 8:20:52 AM | Location : United States







Related Discussions:- Determining the lm curve, Assignment Help, Ask Question on Determining the lm curve, Get Answer, Expert's Help, Determining the lm curve Discussions

Write discussion on Determining the lm curve
Your posts are moderated
Related Questions
What is gross national income per capita The absolute difference in gross national income per capita is 29,828 PPP$ that means UK income per capita is approximately 860% higher

The supply equation for widgets is P = 100 + 10QS. The elasticity of supply between quantity supplied of 9 and 11?

Benefits of Regional Integration Most economic experts cite that regional integration permits disadvantaged countries to realize economies of scale, vie on a broader (often gl

What is money has nothing to do with token We also consider that what is money has nothing to do with token or commodity itself: USD is money in United States but not in

Financial Development A well developed financial system is very essential for the smooth functioning of any economy. One set of important statistical indicators that is used to

For which of the following medical goods or services is the income elasticity of demand largest? a. emergency services after a car accident b. measles shots c. physical ex

Public policies often alter the costs and benefits of private actions. Why is it important for policymakers to consider both the direct and indirect effects of public policies? Sel

discuss modern theory of determination of rent?

estimate paper by stock and watson in a bayesian manner

You are the manager of a firm that receives revenues of $50,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -3,