Economic Policie for the Monetary and Fiscal Policy Coursework - 1

Economic Policie for the Monetary and Fiscal Policy - Coursework Example 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 equati on 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.