What Are Two Factors That Stimulate The Same Effect On The LM Curve?
Meanwhile, there are only two factors that stimulate the same effect on the LM curve: alterations in money supply and autonomous shifts in money demand (Revier, 2000). A rise in money supply creates an excess of money on the initial LM curve, thus shifts the LM to the right as observed in Figure 1.3 (Revier, 2000). The occurrence of excess demand may be eliminated by rising the interest rate, causing the level of money demanded to fall until is meets the quantity of money supplied again (Revier, 2000). The second factor entails that an autonomous increase in money demanded would cause the LM curve to shift leftwards, as shown in figure 1.3.
The degree of the IS curve slope is influenced by two factors:
(i) The interest-inelasticity of private …show more content…
As a result, the traditional policy responses within this school of thought no longer sought to alleviate the economic problems. Consequently, this resulted in the New-Keynesian framework which forms the current mainstream thought in macroeconomics. Ultimately, New-Keynesian aims to provide microeconomic reasoning as the basis of macroeconomics, while taking into account rational expectations theory, and extending upon past theories such as the Phillips curve (Smith, 1969). Furthermore, there is the conception that wages are “sticky”; thus, market failures and involuntary employment may occur (Smith, 1969). Moreover, government intervention is sought to accelerate the process of restoring markets to equilibrium (Smith, 1969). In particular, the New Keynesians altered the general equilibrium theory to include; heterogenous agents, asymmetric information, imperfect markets and incomplete markets (Smith, …show more content…
An example of such market frictions is known as “menu-costs”, which are the high-cost endeavour of repricing all goods (Cukierman, 2009). As markets adjust, firms need to bargain again with their suppliers which could cause “friction” and may prevent the market from re-stabilising immediately, or ever achieving equilibrium (Cukierman, 2009). As a consequence, New-Keynesian have adopted the idea of “fundamental uncertainty” and imperfect information within markets, which requires a cautionary approach to markets (Cukierman,
The degree of the IS curve slope is influenced by two factors:
(i) The interest-inelasticity of private …show more content…
As a result, the traditional policy responses within this school of thought no longer sought to alleviate the economic problems. Consequently, this resulted in the New-Keynesian framework which forms the current mainstream thought in macroeconomics. Ultimately, New-Keynesian aims to provide microeconomic reasoning as the basis of macroeconomics, while taking into account rational expectations theory, and extending upon past theories such as the Phillips curve (Smith, 1969). Furthermore, there is the conception that wages are “sticky”; thus, market failures and involuntary employment may occur (Smith, 1969). Moreover, government intervention is sought to accelerate the process of restoring markets to equilibrium (Smith, 1969). In particular, the New Keynesians altered the general equilibrium theory to include; heterogenous agents, asymmetric information, imperfect markets and incomplete markets (Smith, …show more content…
An example of such market frictions is known as “menu-costs”, which are the high-cost endeavour of repricing all goods (Cukierman, 2009). As markets adjust, firms need to bargain again with their suppliers which could cause “friction” and may prevent the market from re-stabilising immediately, or ever achieving equilibrium (Cukierman, 2009). As a consequence, New-Keynesian have adopted the idea of “fundamental uncertainty” and imperfect information within markets, which requires a cautionary approach to markets (Cukierman,