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Economic Policie for the Monetary and Fiscal Policy - Coursework Example

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Thsi paper, Economic Policie for the Monetary and Fiscal Policy, presents economic policies which are classified into the monetary and fiscal policy in which the overall economic outcome is driven and predicted by the effectiveness of these two factors and the issue of wage price policy…

Extract of sampleEconomic Policie for the Monetary and Fiscal Policy

Download file to see previous pages... According to the paper losed economy is algebraically represented as Y = C(I,Y)+I(i)+G(t),while the LM curve is represented by L(i, Y) = Ms.When the Is curve is vertical the monetary policy tends to be most effective since the key parameters in this case include interest rate and income. In a closed economy, IS curve is the interest rate at which the commodity market is at equilibrium at a given income level. This can be expressed algebraically as Y = C + I + G, where Y is the equilibrium income is the level of consumption, I is the level of investment and G is the government expenditure. It is worth to note that consumption is a function of income while investment is a function of interest rate and government expenditure is a function of tax. Using the equation given above, Y = C + I + G, but C = 100 + 0.4(Y – T) and when this is substituted into the IS equation we obtain Y = 100 + 0.4(Y – T) + I + G, since I = 1000 + 0.1Y – 20i which when replaced to the equation gives Y = 100 + 0.4(Y – T) + 1000 + 0.1Y – 20i + G,note that T= 300 finally the value of G = 100 which when replaced into the equation yield Y = 100 + 0.4(Y – 300) + 1000 + 0.1Y – 20i + 100. When this equation is simplified to give the IS curve we obtain 0.5Y = 1080-20i and the IS curve will be represented by the equation below; Y = 2160 – 40i.
This stude highlights that LM curve is the interest rate at which the money market is in equilibrium at a given level of income. In this case Money demand equals money supply and this is algebraically presented as L (i, Y) = MS where L is the demand for money which is a function of income and interest rate, MS is money supply. Using the empirical figures given above, 5Y – 10i= 300 and this can be rearranged into 5Y=300+10i, this yields the LM curve of Y=60+ 2i. IS-LM curve can be attained where there is equilibrium in the commodity market and money market. Using the IS and LM equations and combining them we obtain i= 50 and Y = 160. ...Download file to see next pagesRead More
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