Supopose that you have the following equations for the IS-LM model. The following are the equations of the IS-LM model, here including a feature that taxes are not simply given but depend onincome through a tax function,
(T(Y). IS Curve: Y=C(Y-T(Y)+I(r)+G
LM Curve: M / P=L(r,Y)
Where Y is the national income or GDP and r isthe interest rate; I is investment, G is government, M/P is real balances
a. The Fed Funds rate was near zero in 2010. At such low interest rates, it would presume that the economy will be stimulated and promote economics growth. It appears not to be the case. Some could argue that the interest rates are not sensitive to the demand for money. Would an upward sloping LM curve still e applicable?
b.Suppose there is an upward shift in the investment function (more investment at each interest). What will happen in the IS-LM model to the interest rates and output assuming an upward sloping LM curve and downward sloping IS curve? Besure to show all the shifts and the new equilibrium points from the shift in the graph.