Suppose the money supply process is now represented by the following function:

where m measures the sensitivity of money supply with respect to the interest rate.

(i) Using this money supply specification, together with the money demand function in equation derive a new LM function and curve as L¹M¹; and,

(ii) Use this new LM function/curve together (and overlay or in the same diagram) with the IS and LM functions/curves derived in parts (a) and (b) of question 1 as I⁰S⁰ and L⁰M⁰ to explain and show quantitatively and graphically the relative efficacy of a cut of the income tax rate to 15%.

Question

With the aid of the money market and the IS-LM fixed-price framework, model algebraically and graphically the key macroeconomic impact effects of an improvement financial payments technology.