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Post by Guest on May 13, 2016 14:13:37 GMT
Why does in flexible Md shift to the right when i* increases and it shifts left under same situation under fixed? This is what it implies in the diagrams if you look at the point of contact where Ms=Mp at i*high. The equilibrium is shown to be the leftward shift of Ms with leftward shift Mp. Thanks
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Post by Oliver on May 13, 2016 21:20:41 GMT
Hi,
Remember, output (demand for liquidity services) can shift the Md curve. Look at the IS-LM diagram. Under one regime, Y rose, under the other it fell - thus explaining why the Md curve shifted in opposite directions.
Best
Oliver
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Post by GUEST on May 13, 2016 21:31:16 GMT
Would you mind looking at your diagrams though as I think that you have drawn the new Ms in the wrong position. I believe that you have drawn it respectively down from the wrong Md. Thanks
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Post by Guest on May 13, 2016 21:39:50 GMT
or maybe I am misinterpreting, are you saying that LM shift is shifting Md? I thought shifts in LM only shifted IS?
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Post by Oliver on May 13, 2016 21:41:57 GMT
Hi,
The diagrams are correct.
What is confusing is this:
- Under the flex exchange rate regime - the Md curve shifts out.
- Under the fixed exchange rate regime - the Md curve shift in (a shift out because of the IS curve shift out and a shift in because of the contractionary monetary policy --- with the net effect being a shift in for Md. We know the net effect is a shift inwards because equilibrium output is lower in the IS-LM diagram).
Best
Oliver
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Post by guest on May 13, 2016 21:55:26 GMT
Ok, thanks i think i understand. Why does LM shift Md though in this case? Is it shifting Md and Ms?
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