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Interest rate constant

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Reference no: EM131227438

Suppose equilibrium in financial markets is given by:

M / P = Y L(i)

(-)

a. derive an expression for Y in terms of i (i.e. Y = ....).

b. suppose the central bank holds the money supply constant. Using your answer to part a, derive dY/di. What is its sign? How does this relate to the slope of the LM curve we derived graphically in class? (Hint: if y= 1 / f(x), then y' = - f' /f(x)2)

c. If the central bank now wants to keep the interest rate constant, instead of the money supply, how does it need to adjust the real money supply as income increases?

Reference no: EM131227438

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