Re: DSE Macro!

Posted by Arushi on Apr 24, 2014; 5:44am
URL: http://discussion-forum.276.s1.nabble.com/DSE-Macro-tp7587665p7587695.html

I agree with akshay. Start with drawing the i and Md(money dd) graph. In standard IS-LM, we take Ms(money supply) to be a vertical line but in this question, since Ms is in increasing function of i, we take Ms to be a positively sloped curve. Now, to derive the LM curve for this situation, increase Y, (to see how the eqb i changes), so that the Md(money demand) curve shifts out, but you notice that the change in equilibrium i is lesser in the case of the positive slope Ms as compared to the vertical Ms(standard). Hence our derived LM curve is flatter compared to the standard LM curve. IS curve remains the same so you can check how the economy reacts to a fiscal policy now that you have both the standard and new LM curves. You will witness that Y changes more in the new LM when IS shifts.