Question

According to the IS-LM model, what happens in the short run to the interest rate, income,...

  1. According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? Be sure your answer includes an appropriate graph.
  1. The government increases taxes.

___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

  1. The price level decreases.

___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

  1. The central bank increases the money supply.

___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

  1. The government decreases government purchases.

___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

0 0
Add a comment Improve this question Transcribed image text
Answer #1

a)

Increase in government tax would cause a leftward shift in the IS curve thereby establishing equilibrium at a lower level. Thus, the interest rate and output level will fall. When the level of output falls, the consumption level would also go down.

Lower demand does not motivate investment but there might small correction due to lower interest rate.

b)

Increase in the price level shifts the LM curve to left thereby driving up the interest rate in the market. Output and consumption level will fall. Higher price reduces the purchasing power of people. Higher interest rate discourages investments.

c)

When the central bank increases the money supply. it shifts LM curve to right thereby pulling down the interest rate. it raises the level of output and consumption. Lower interest rate also encourages investments.

d)

Reduction in government purchases shifts the IS curve to left, so output and consumption will be down. The interest rate will also be down. Eventually, lower interest might increase private interest-sensitive investments.

Add a comment
Know the answer?
Add Answer to:
According to the IS-LM model, what happens in the short run to the interest rate, income,...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • According to the IS-LM model, what happens in the short run to the interest rate, income,...

    According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the following circumstances? a. The central bank increases the money supply. b. The government increases government purchases. c. The government increases taxes. d. The government increases government purchases and taxes by equal amounts.

  • Use the IS-LM model to predict the short-run effects of each of the following shocks on...

    Use the IS-LM model to predict the short-run effects of each of the following shocks on income, the interest rate, consumption, and investment. In each case, explain what the Bank of Canada should do to keep income at its initial level. For each of these four shocks, (1) shift the appropriate curve in the IS-LM graph to reflect how the economy will respond to the shock; (2) indicate the impact of the shock on consumption, income, interest rate, and investment...

  • Consider the following IS-LM model, in which the central bank targets an interest rate of i...

    Consider the following IS-LM model, in which the central bank targets an interest rate of i C 11500.3YD 1 = 2000 + 0.3Y-8000i G 2000 T 1500 = 4Y-16,000i -= 0.02 c) Solve for value of the real money supply that the central bank must set to achieve its interest rate target, and the equilibrium level of output, by combining the IS and LM relations. Compute the values of equilibrium consumption, investment, and money demand. If the GDP deflator is...

  • Q: Draw the IS??LM model. Label the short run output and equilibrium interest rate a) \Animal...

    Q: Draw the IS??LM model. Label the short run output and equilibrium interest rate a) \Animal spirits" was Keynes' explanation for random shifts in the IS curve due to consumers' desire for consumption goods. An increase in consump- tion shifts the IS curve to the right. What happens to short run output and the equilibrium interest rate after this shift? What actions could the Federal reserve take to keep the interest rate xed at its original level?

  • Using the IS-LM and Aggregate Supply-Aggregate Demand (AS-AD) models of Chapter 12 with a flat short-run...

    Using the IS-LM and Aggregate Supply-Aggregate Demand (AS-AD) models of Chapter 12 with a flat short-run AS curve (that is, completely sticky prices), suppose the economy is at the natural rate of unemployment and so, at long-run equilibrium. Suddenly, taxes are reduced with no change in government spending. Tell me (or show on a graph) what happens to the IS and/or LM curves. Show on a different graph what happens on the AS-AD diagram in the short-run (drawing in the...

  • 3. Suppose that prices are completely rigid, so that the nominal and the real interest rate...

    3. Suppose that prices are completely rigid, so that the nominal and the real interest rate are necessarily equal. Money-market equilibrium is therefore given b L(r,Y). a. Suppose that government purchases increase, and that the central bank adjusts the money supply to keep the interest rate unchanged. i. Does the money supply rise or fall? ii. What happens to consumption and investment? b. Suppose that government purchases increase, and that the central bank adjusts the money supply to keep output...

  • onsider the following IS-LM model with a banking system: Consumption: C = 7 + 0.6YD Investment:...

    onsider the following IS-LM model with a banking system: Consumption: C = 7 + 0.6YD Investment: I = 0.205Y − i Government expenditure: G = 10 Taxes: T = 10 Money demand: Md/P=Y/i Demand for reserves: Rd = 0.375Dd Demand for deposits: Dd = (1 − 0.2)Md Demand for currency: CUd = 0.2Md This says that consumers hold 20% (c = 0.2) of their money as currency and the required reserve ratio is 37.5% (θ = 0.375). Demand for central...

  • 3. (20 points) Totally differentiate the following IS-LM model and show what happens to the equilibrium...

    3. (20 points) Totally differentiate the following IS-LM model and show what happens to the equilibrium interest rate (*) when the money supply increases, and all other things remain the same. Y = C(Y) + I(i) +G M° = KY +L(i) where total income (Y) and interest rates (i) are endogenous. In this case, I(i) is investment and it decreases when interest rates go up. Let Li) be the demand for 1 cash, which goes down when interest rates go...

  • 1. What is the​ short-run effect on the exchange rate of an increase in domestic real​...

    1. What is the​ short-run effect on the exchange rate of an increase in domestic real​ GNP, given expectations about future exchange​ rates? A.Money demand​ increases, the domestic interest rate​ increases, and the domestic currency depreciates. B.Money demand​ increases, the domestic interest rate​ increases, and the domestic currency appreciates. C.Money demand​ decreases, the domestic interest rate​ decreases, and the domestic currency appreciates. D.Money demand​ decreases, the domestic interest rate​ decreases, and the domestic currency depreciates. 2. In our discussion of​...

  • Use the IS-LM-PC model with an inflation-targeting central bank to answer the following short answer questions....

    Use the IS-LM-PC model with an inflation-targeting central bank to answer the following short answer questions. In this question, you don’t need to explain or show the graph. But, when you’re not sure of the answer, don’t guess; instead, use the IS-LM-PC model to help you. An increase in the risk premium. Inflationary expectations are adaptive. i. What happens to inflation over time? ii. What does the central bank need to do to return to the medium-run equilibrium?

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT