1
$\begingroup$

What is the effect of government reforms (unspecified) that decrease customer's confidence about their future wages (analysed using the IS-LM model)?

I think that less confidence about future wages will cause people to save more (rise in MPS or equivalently a fall in MPC). This causes the autonomous component of the IS curve to decrease, and the gradient to become flatter.

Using the following model:

$$Y = \frac{1}{(1-c_1-d_1)}\cdot A - \frac{d_2}{(1-c_1-d_1)}\cdot i $$

According to my textbook, however, this is incorrect. It suggests that the IS curve is shifted to the right, leading to an increase in $i$ and $Y$.

Could somebody kindly shed some light on this for me?

Thanks!

$\endgroup$
4
  • 1
    $\begingroup$ Welcome to econ.SE! Please consider taking the time to read the help section (economics.stackexchange.com/help) to familiarize yourself with some of our common practices. In addition, meta.math.stackexchange.com/questions/5020/… should give you a start at learning how to typeset mathematics here so that your posts say what you want them to, and also look good. Cheers! $\endgroup$ Apr 26 '15 at 21:08
  • $\begingroup$ Could you add your textbook's name & page ? $\endgroup$
    – Yann
    Apr 27 '15 at 10:33
  • $\begingroup$ The textbook is Blanchard Macroeconomics European 2nd Edition. The question is from the online revision software, however. There's no further information in the question, although on reflection it could have been related to a chapter on small open economies, in which case I agree with their answer naturally. $\endgroup$
    – Padster
    Apr 28 '15 at 9:09
  • $\begingroup$ Sorry, but I don't see what they have in mind $\endgroup$
    – Yann
    Apr 28 '15 at 11:25

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.