3. Imagine a country in which Keynesians and Monetarists agree about all aspects of the economy e...
3. Imagine a country in which Keynesians and Monetarists agree about all aspects of the economy except for the interest elasticity of money demand (c2). Assume C-ab(Y T) - cr where all other equations follow standard IS/LM specifications. Formally, using superscripts "M" and "K" to denote Monetarists and Keynesians respec- tively, we know c^> cM. Which of the following is correct regarding the impact of a tax increase AT > 0) upon the changes of consumption and investment? Page 2
3. Imagine a country in which Keynesians and Monetarists agree about all aspects of the economy except for the interest elasticity of money demand (c2). Assume C-ab(Y T) - cr where all other equations follow standard IS/LM specifications. Formally, using superscripts "M" and "K" to denote Monetarists and Keynesians respec- tively, we know c^> cM. Which of the following is correct regarding the impact of a tax increase AT > 0) upon the changes of consumption and investment? Page 2