Consider the money market to better understand the horizontal LM curve. a. What is on the left-hand

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Consider the money market to better understand the horizontal LM curve.

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a. What is on the left-hand side of equation (5.3)?

b. What is on the right-hand side of equation (5.3)?

c. Go back to Figure 4-2. How is the function L(i) represented in that figure?

d. Modify Figure 4-2 to represent equation (5.3) in two ways.
How does the horizontal axis have to be relabeled? What is the variable that now shifts the money demand function? Draw a modified Figure 4-2 with the appropriate labels.

e. Use your modified Figure 4-2 to show that (1) as output rises, to keep the interest rate constant, the central bank must increase the real money supply; (2) as output falls, to keep the interest rate constant, the central bank must decrease the real money supply.

Data from Figure 4-2

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Related Book For  book-img-for-question

Macroeconomics

ISBN: 9780134897899

8th Edition

Authors: Olivier Jean Blanchard

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