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.

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Definitions:

Microcredit Programs

Financial services provided to low-income individuals or to those without access to typical banking services.

Repayment Rates

The percentage of borrowed principal that is paid back to lenders within a specified period of time.

Conditional Cash Transfers

Anti-poverty programs in which households receive regular cash transfers (grants) as long as they keep their children in school and participate in preventative health care programs.

Poor Families

Households with income levels below a designated poverty threshold, facing financial hardship.