Assume That in a Certain Economy, the LM Curve Is

question 24

Essay

Assume that in a certain economy, the LM curve is given by Y = 2,000r - 2,000 + 2 (M / P), and the IS curve is given by Y = 8,000 - 2,000r + u, where u is a shock that is equal to +200 half the time and -200 half the time. The price level (P) is fixed at 1.0. The natural rate of output is 4,000. The government wants to keep output as close as possible to 4,000 and does not care about anything else. Consider the following two policy rules: i. Set the money supply M equal to 1,000 and keep it there, and ii. Manipulate M from day to day to keep the interest rate constant at 2 percent.
a.Under rule i, what will Y be when u = +200? What will Y be under rule i when u = -200?
b.Under rule ii, what will Y be when u = +200? What will Y be under rule ii when u = -200?
c.Which rule will keep output closer to 4,000?

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Definitions:

Caesar's Column

A novel by Ignatius L. Donnelly published in 1890, depicting a future society in which inequalities and economic injustices lead to a revolution in the streets of New York City.

Walter Rauschenbusch

A Christian theologian and key figure in the Social Gospel movement, advocating for social reform based on Christian ethics.

Inequality of Wealth

Describes the uneven distribution of assets, money, and resources among individuals or groups within a society.

Christian Ideal

The principles and teachings of Christianity that followers strive to embody, including love, compassion, and forgiveness.