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

What is loanable funds market, Construct loanable funds market in the conte...

Construct loanable funds market in the context of an open economy assuming that the home country is a small open economy. Discuss the effect of an enhance in the govt. expendi

Describe the classical model of macroeconomics, Q. Describe the classical m...

Q. Describe the classical model of macroeconomics? 'The classical model' was a term coined by Keynes in the 1930s to signify essentially all the ideas of economics as they appl

Internatinal trade, how can a country maintain equilibrium GDP with foreign...

how can a country maintain equilibrium GDP with foreign trade?

What are the explicit costs, A young chef is considering opening his own su...

A young chef is considering opening his own sushi bar. to do so, he would have to quite his current job, which pays him $20,000 a year , and take over a store building that he owns

U.s. corporations and workers, What do you presume had happened to get the ...

What do you presume had happened to get the U.S. corporations and workers to take their eyes off of their own economic interest? It seems the "carrot" of cheaper prices were dangle

the effect of on reserves and the monetary base, Many developing countries...

Many developing countries have suffered banking crises in which depositors lost part or all of their deposits (in some countries there is no deposit insurance). This type of crisis

Consumption and GDP, At first, it may seem obvious that consumption will re...

At first, it may seem obvious that consumption will rely on Y. If GDP is doubled in real terms over a number of years, government consumption, private consumption and investment wi

Determine what is the yield curve, Determine what is the yield curve Th...

Determine what is the yield curve The yield curve is a graph of interest rates of different maturity (recalculated to yearly rates) at a particular point in time. It is common

Perfectly competitive firm, Explain why a perfectly competitive firm does n...

Explain why a perfectly competitive firm does not expand its sales without limit if its horizontal demand curve indicates that it can sell as much as desires at the current market

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