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

Real GDP using chained-dollar method, 2012 Mangoes 91 boxes $7 a box ...

2012 Mangoes 91 boxes $7 a box Pinapples 56 boxes $12 a box 2013 Mangoes 108 boxes $14 a box Pinapples 70 boxes $8 a box Real GDP in 2013 using the chained-dol

Allocate their scarce resources, What are the three methods that societies ...

What are the three methods that societies have used to allocate their scarce resources? Give an example of each method. Give an example of a good that uses all three methods at onc

Demographic features in development, DEMOGRAPHIC FEATURES IN DEVELOPMENT: ...

DEMOGRAPHIC FEATURES IN DEVELOPMENT: We have learned in the previous unit that human resources play a significant role in generating aggregate flow of goods and services. The

Employees'' productivity, what measures should be taken to raise the produc...

what measures should be taken to raise the productivity of the workers?

Calculate rental price of capital, Let the real interest rate, i r , equal ...

Let the real interest rate, i r , equal 5 percent and the rate of depreciation, d, equal 10 percent.  In this case, if the price of a piece of capital is P K = $10,000, what is th

Exchange rate, what are the types of exchange rate

what are the types of exchange rate

ORTHODOX KEYNESIAN, WHAT IS THE CENTRAL PROPOSITION OF THE ORTHODOX KEYNESN...

WHAT IS THE CENTRAL PROPOSITION OF THE ORTHODOX KEYNESNIANS?

What is price level, The price level is the monetary value of a good or ser...

The price level is the monetary value of a good or service.

Damaging to the economy, Why do financial crises occur and why are they so ...

Why do financial crises occur and why are they so damaging to the economy?

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