In Macroeconomics, You Studied the Equilibrium in the Goods and Money

question 62

Essay

In macroeconomics, you studied the equilibrium in the goods and money market under the assumption of prices being fixed in the very short run. The goods market equilibrium was described by the so-called IS equation
R_i = β₀ - β₁Y_i + u_i
where R represented the nominal interest rate and Y was real GDP. β₀ contained variables determined outside the system, such as government expenditures, taxes, and inflationary expectations.
The money market equilibrium was given by the so-called LM equation
R_i = $\gamma _ { 0 }$ + $\gamma _ { 1 }$ Y_i + v_i
and $\gamma _ { 0 }$ contained the real money supply and the intercept from the money demand equation.
Show that there is simultaneous causality bias in this situation.

---

Definitions:

Increasing Returns

A condition in economics when an increase in the scale of production leads to a greater proportional increase in output.

Isoquants

Curves that represent combinations of inputs that produce the same level of output, used in production theory.

Output

Output refers to the quantity of goods or services produced by a firm, industry, or economy within a certain period.

Increasing Returns

An economic principle where a proportionate increase in inputs leads to a greater proportionate increase in outputs, typically seen in production processes.