What is is-lm model with inflation, Macroeconomics

Assignment Help:

Q. What is IS-LM model with inflation?

The IS-LM model with inflation 

The basic assumption

We developed IS-LM model with constant wages and prices. We can now extend this model to allow for inflation. Rather than constant wages and prices, we should presume that π = πW = πe. In the same that we dropped assumption of constant P when we went on to AS-AD model to allow for changes in real wages, we will drop assumption that π = πW to allow for inflation and changing real wages. 

Let's briefly justify the assumption π = πW = πe. πW = πe may be illustrated by realizing that if workers expect 6% inflation, they will demand 6% wage increases to sustain the same real wage (they typically require more than 6% and an increase in real wages though this is since the growth of the economy will allow for this - always think of these models as if there is no growth). 

Assumption π = πW means that we have a balanced inflation. Since in IS-LM model, the real wage is then constant. This is a reasonable assumption if economy is in a state where aggregate demand is inadequate and L is lower than profit-maximizing level.


Related Discussions:- What is is-lm model with inflation

Externalies, how does government regulate externalies

how does government regulate externalies

Inflation in sweden, Inflation in Sweden Figure Inflation in Swed...

Inflation in Sweden Figure Inflation in Sweden 1830 - 2010. Source: SCB. There are four aspects which are interesting when we look at inflation data for Sweden

Money market with inflation and rising money supply, Q. Money market with i...

Q. Money market with inflation and rising money supply? Figure: The money market with inflation and rising money supply If we let π M refer the growth rate in money

Determining the lm curve, This problem revolves around determining the LM c...

This problem revolves around determining the LM curve, as we did earlier in the term such that money demand (M D ) equals money supply (M S ), however in this instance under differ

Who was the labour chancellor gordon brown, Who was the Labour Chancellor G...

Who was the Labour Chancellor Gordon Brown In the period between 1997 and 2006 the Labour Chancellor Gordon Brown was committed to self-imposed Sustainable Investment Rule that

Current event opportunity, Give an example of a current event opportunity c...

Give an example of a current event opportunity cost that includes graphs

Define economics, What is the study of economics about?

What is the study of economics about?

Economic functions of money - a medium of exchange, Economic functions of m...

Economic functions of money - A medium of exchange This is its most important role. Without money we would live in a barter economy where we would have to trade goods and

Gkx industries expects sales of its hydraulic seals, GKX Industries expects...

GKX Industries expects sales of its hydraulic seals (in inch and metric sizes) to increase according to the cash flow sequence $70+4k, where k is in years and cash flow is in $1000

Money demand, money demand = 3500 - 250i what is the interest rate present ...

money demand = 3500 - 250i what is the interest rate present if the money market is in equilibrium

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