Re: Isi peb 2016

Posted by knowpraveen on Apr 27, 2016; 3:19am
URL: http://discussion-forum.276.s1.nabble.com/Isi-peb-2016-tp7600058p7600083.html

There is only one way to go about this problem. The given case is that of a liquidity trap which is why we got the equilibrium point in the fourth quadrant. The interest rate has bottomed and has reached r(min), any increase in the money supply is going to be futile from this point on.

So, what next! To increase r to 0.2 without Y immediately adjusting to 2500 there should be an exogenous increase in Investment by an amount 102.5 which gives us an equilibrium at r=1/5 and IS curve as Y=2090-200r

Draw the graph and that is going to give the question some direction. I hope its going to be a cakewalk if you don't take into consideration the negative equilibrium point. Don't draw the graph by extending it into the fourth quadrant, IS and LM curves should be inside the first quadrant itself. If you doubt the validity of the curves, its a liquidity trap at play.

I hope this is the way to go about the problem. If you have different thoughts kindly let me know, we will complete the problem by taking the discussion further. Thanks Varnika and Urvashi for asking. I skipped the problem at first glance. I never thought this problem would be a tricky one, given the simplicity of sectoral demand functions upon initial inspection.