Suppose Equilibrium in a financial market:
M/P = YL(i) -
a. What is an expression for Y in terms of i (i.e. Y = ....)
b. Suppose the central bank holds the money supply constant. Using part a's answer, derive dy/di. What's the sign? How does it relate to the slope of LM curve derived in class? (hint: if y=1/f(x), then y'= -f'/f(x)^2)
Now suppose that equilibirum in financial markets is:
M/P = Y (.25 - i)
c. Derive an expression for Y in terms of i (i.e. Y = ...)
d. Suppose the central bank holds the real money and supply constant. Using part c's answer, derive dy/di. Whats the sign? If there is a small increase in i, by how much does output need to increase to maintain equilibrium in financial market?