Post by Guest on Mar 3, 2016 1:44:46 GMT
Hi,
I have a question concerning the general equilibrium in the CC-LM model. In IS-LM, all points on the IS curve represent equilibrium in the goods market, on the LM curve equilibrium in the money market and by Walras' Law also in the bonds market as there is a tradeoff between holding money and bonds. Now, in the CC-LM model, the LM curve is supposed to be the same (equilibrium in bonds and money markets) and the CC curve basically integrates equilibrium in the loans (credit) market to the IS equilibrium in the goods market. My question is, why are we allowed to substitute the money-market equilibrium equation D(i,y)=m(i)*R into the loan market equilibrium L(p,i,y)=lambda(p,i)*D(1-tau) in deriving the CC curve? Are we then in the construction of the CC curve not already explicitly assuming equilibrium in goods, loan and money market and therefore implicitly also in the bonds market? This would also seem to imply all points on the LM and CC curve assume money market equilibrium?
Maybe someone knows what I am getting wrong here.
Thanks and good luck for the test!
I have a question concerning the general equilibrium in the CC-LM model. In IS-LM, all points on the IS curve represent equilibrium in the goods market, on the LM curve equilibrium in the money market and by Walras' Law also in the bonds market as there is a tradeoff between holding money and bonds. Now, in the CC-LM model, the LM curve is supposed to be the same (equilibrium in bonds and money markets) and the CC curve basically integrates equilibrium in the loans (credit) market to the IS equilibrium in the goods market. My question is, why are we allowed to substitute the money-market equilibrium equation D(i,y)=m(i)*R into the loan market equilibrium L(p,i,y)=lambda(p,i)*D(1-tau) in deriving the CC curve? Are we then in the construction of the CC curve not already explicitly assuming equilibrium in goods, loan and money market and therefore implicitly also in the bonds market? This would also seem to imply all points on the LM and CC curve assume money market equilibrium?
Maybe someone knows what I am getting wrong here.
Thanks and good luck for the test!
