In macroeconomics, you studied the equilibrium in the goods and money market under the assumption of prices being fixed in the very short run. The goods market equilibrium was described by the so-called IS equation
R_i = β₀ - β₁Y_i + u_i
where R represented the nominal interest rate and Y was real GDP. β₀ contained variables determined outside the system, such as government expenditures, taxes, and inflationary expectations.
The money market equilibrium was given by the so-called LM equation
R_i = $\gamma _ { 0 }$ + $\gamma _ { 1 }$ Y_i + v_i
and $\gamma _ { 0 }$ contained the real money supply and the intercept from the money demand equation.
Show that there is simultaneous causality bias in this situation.

Question

In macroeconomics, you studied the equilibrium in the goods and money market under the assumption of prices being fixed in the very short run. The goods market equilibrium was described by the so-called IS equation
R_i = β₀ - β₁Y_i + u_i
where R represented the nominal interest rate and Y was real GDP. β₀ contained variables determined outside the system, such as government expenditures, taxes, and inflationary expectations.
The money market equilibrium was given by the so-called LM equation
R_i =

\gamma _ { 0 }

+

\gamma _ { 1 }

Y_i + v_i
and

\gamma _ { 0 }

contained the real money supply and the intercept from the money demand equation.
Show that there is simultaneous causality bias in this situation.

Quizplus · Accepted Answer

The Answer of In macroeconomics, you studied the equilibrium in the goods and money market under the assumption of prices being fixed in the very short run. The goods market equilibrium was described by the so-called IS equation R_i = β₀ - β₁Y_i + u_i where R represented the nominal interest rate and Y was real GDP. β₀ contained variables determined outside the system, such as government expenditures, taxes, and inflationary expectations. The money market equilibrium was given by the so-called LM equation R_i = $\gamma _ { 0 }$ + $\gamma _ { 1 }$ Y_i + v_i and $\gamma _ { 0 }$ contained the real money supply and the intercept from the money demand equation. Show that there is simultaneous causality bias in this situation.

In Macroeconomics, You Studied the Equilibrium in the Goods and Money