Consider closed economy with fixed prices and wages

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Consider a closed economy with fixed prices and wages. Domestic demand for goods is given by: AE = C (y - T) + I (j - pi e) + G, while demand for real money balances is equal to M^D/P = L (Y, i), where M^D is nominal money demand, P is the price level, Y is real income, and i is the nominal interest rate, pi^e is the inflationary expectations. Assume the price level is fixed at P = 1. Suppose that the central bank fixes the money supply M^s = M. The balanced budget multiplier. Assume that T is exogenous. How do equal increases in G and T affect the position of the IS curve? What is the effect on Y for a given level of nominal interest rate i? Specifically: Derive the balanced budget autonomous expenditure multiplier partial differential Y/partial differentialAE_0 Derive the expression for the balanced budget government spending multiplier dY/dG_i = const

Reference no: EM131424560

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