Macroeconomics in Finance Essay Example | Topics and Well Written Essays - 1500 words

Macroeconomics in Finance - Essay Example The model is taken to be equally influential as the Keynesian model that which was originally formulated by John Keynes in the 20th century. The model relates employment and aggregate demand to three exogenous quantities namely; the government spending, business expectations by the state and the total amount of money in circulation. The model can be understood in the general equilibrium theory. The model can be used in line with the Phillips curve to make prediction for example an increase in the general employment level would lead to increased inflation rate (the general price rise) the resultant increase in money supply would hence increase employment and the output level (Obstfeld, M. and Kenneth, R.(1996) Under the model a sustained fail in general prices (deflation) will be caused by a shift in the supply curve and more importantly the demand curve for goods and interest. This means a fall in how the prices of goods compared to how much the economy is willing to buy of. It brings the idea of benefit of unemployment, insurance and fluctuations costs. i.e. the unemployed exhibit significant heterogeneity in marginal propensity to consume the available income and in holding of wealth. (Obstfeld, and Kenneth, 1996) Aspects for example it has all the variables that are contained in the IS-LM model i.e. consumption interest rate, expected inflation, the gross domestic product, investment and government spending. (Uzawa, 1969) However, the two models have some differences in their basic setup. The IS curve is given as Y=C+I+G+NX Where NX= net exports While the LM curve is given as M/P=L (I, Y) Where M= money supply P= average price L= liquidity I= interest rate U=GDP Question Two IS -LM-FE Mundell Fleming model in comparing effect of an increase in public spending under fixed exchange rates Under a flexible exchange rate an increase in public spending will translate into an increase in the money supply in any given country. According to this model an increase in money supply will shift the LM curve to the right. The resultant effect will be reduced local interest rate thus