Thanks all

these, like the last set of problems you posted, are relatively simple. Did you even try to solve them on your own before posting them here?

I did :( but I keep getting into snags.

I think I've managed to graph them correctly.. is LM curve horizontal, indicating a Keynsian case? And since in my graph, the IS-LM intersection is below BP curve, I think that is a BOP deficit?

I'm unsure how to reflect the money supply change on LM for b, however.

1) supply versus demand

2) buy low sell high

that's pretty much all you need to know...

yes the LM curve in your question is horizontal (since the interest rate is mapped on the vertical axis in the IS-LM model).

The intersection of the IS and LM curve provides the internal (or domestic) equilibrium whereas the BoP curve indicates the "external" equilibrium if you will.

They are at balance when the BoP curve intersects with the IS and LM curves at their equilibrium.

If the BoP curve lies below the IS-LM equilibrium point then the balance of payment is in deficit, if the BoP curve is above then it is in surplus. So in your case the balance of payments are in surplus.

Both situations (deficit or surplus) should only occur in fixed exchange rate regimes, otherwise exchange rates will adjust to bring the 3 curve into long-run equilibrium.



Hopefully that will help get you on track again...

I may agree with Trife.

Thanks

an increase in the money supply will still shift the LM curve to the right (or in this case, downward).

Since the IS curve, generally speaking, is downward sloping this should lead to increased GDP (a movement rightward on the X-axis) and decreased interest rates (a movement downward on the Y-axis).

Since the overall equilibrium point will have shifted down and to the right in this scenario, the BoP deficit will also reduce.

This of course is all depending on how mobile/immobile capital is (which depends on the slop of the BoP curve). My analysis above assumes that capital is sufficently mobile (aka the LM curve has a steeper slope than the BoP curve).

As to how to calculate it... well big into how the LM curve is derived and you should be able to see how to do it.

Got it, thanks a lot. All those concepts make perfect sense. However, I'm really lost as to the math side. I see that Money Supply (Ms/P) = Y - r for LM curve derivation purposes, but I'm really not sure how to calculate the increase's effect on all those variables using the limited variables I'm given.

And do you mean in your third sentence that the BoP surplus would increase? As there was a BoP surplus in the first place?

sorry I misread the original post I thought you said the BoP was below the IS-LM equilibrium.

If it is above the original IS-LM equilibrium then yes the surplus will increase.

Thanks

How represent the curve using a polynomial.

?

wow.. it's been years since I"ve done this..

Time to come out of retirement hehe