Question

Aggregate Demand II: Applying the IS - LM Model- End of Chapter Problem

 

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 Fed should do to keep income at its initial level.

 

For each of these four shocks, (1) shift the appropriate curve in the IS-IM 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 by placing each in the appropriate category of "increase" or "decrease", and (3) identify the Fed's proper policy response to maintain income at its initial level.

 

Answer 1