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Post by Oliver on Feb 17, 2016 16:51:21 GMT
Hi all,
A common question:
I tried really hard to solve this question. But, I get a negative interest rate. I know this doesn't make sense but I don't know what I'm doing wrong. Please help!
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Post by Oliver on Feb 17, 2016 16:56:50 GMT
Hi,
This is how to solve this type of question:
1. Solve the system of equations ignoring the fact that the interest rate can't go negative.
2. If the interest rate you find is positive, you've found the equilibrium and you're done.
3. If the interest rate you find is negative, then the equilibrium interest rate is 0. Use the IS curve with i=0 to find equilibrium Y.
I hope this helps. Happy solving!
Oliver
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Post by Oliver on Feb 17, 2016 17:00:27 GMT
Ps. It always helps to sketch an IS-LM diagram first. This will give you some intuition about what you're trying to do and what steps to take when it comes to the maths!
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