Determining the lm curve, Macroeconomics

Assignment Help:

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.    


Related Discussions:- Determining the lm curve

Impact of an increase in thriftiness, Consider the impact of an increase in...

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption

Multiple expansion in banking, Multiple Expansion We have seen that a s...

Multiple Expansion We have seen that a single bank in a banking system can lend rupee for rupee with its excess reserves. What is the lending ability of the commercial banking

Demand for money - theories, The amount of wealth that households and busin...

The amount of wealth that households and business desire to hold in the form of money balances is called the 'demand for money'. Individuals and firms have at their command only

Stock of a particular company, Suppose that you have bought a total of 3100...

Suppose that you have bought a total of 3100 shares of stock of a particular company. You bought 1200 shares of stock at $17 per share, 900 shares of stock at $11 per share, and th

How taxes and subsidies impact market efficiency, Analyze how taxes and sub...

Analyze how taxes and subsidies impact market efficiency. Speculate if market efficiency would be increased or decreased without issues of taxes and subsidies. Justify your respons

Consumers become better educated about the products, How can consumers beco...

How can consumers become better educated about the products they are considering for purchase? To what extent do you personally go to acquire the best information available?

New equilibrium price and equilibrium quantity, If demand increases and the...

If demand increases and the supply increases also, then what will happen to the new equilibrium price and equilibrium quantity? Explain what is happening with the curves and how pr

Classical model, using a graph of the classical labour market,illustrate th...

using a graph of the classical labour market,illustrate the effects of a real wage existing in the market that is lower than the equilibrium real wage.what will eventually happen i

Goods services will be produced and sold in the us, Who decides what goods ...

Who decides what goods services will be produced and sold in the US? Ans) It is mostly the American consumer. The US government also plays a big role in the nation's economy, co

Average cost curve, A firm with a U-shaped average cost curve finds that it...

A firm with a U-shaped average cost curve finds that its revenues exceed its costs when it sets price equal to marginal cost. On which part of its average cost curve is the firm op

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd