Curve shift scenarios

Question 1

Government spending ↑ (fiscal expansion)

Answer 1

Curve Shift: IS → right
Short-Run Effect: ↑ Y, ↑ π
Medium-Run Effect: CB raises i → LM left, Y → Yₙ, π ↑

Question 2

Government spending ↓ (austerity)

Answer 2

Curve Shift: IS → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: CB lowers i → LM right, Y → Yₙ, π ↓

Question 3

Taxes ↑ (fiscal contraction)

Answer 3

Curve Shift: IS → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: CB lowers i → LM right, Y → Yₙ, π ↓

Question 4

Taxes ↓ (stimulus)

Answer 4

Curve Shift: IS → right
Short-Run Effect: ↑ Y, ↑ π
Medium-Run Effect: CB raises i → LM left, Y → Yₙ, π ↑

Question 5

Central bank cuts i (monetary expansion)

Answer 5

Curve Shift: LM → right
Short-Run Effect: ↑ Y, ↑ π
Medium-Run Effect: π ↑ → CB raises i → LM left, Y → Yₙ

Question 6

Central bank raises i (tightening)

Answer 6

Curve Shift: LM → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: π ↓ → CB lowers i → LM right, Y → Yₙ

Question 7

Oil price ↑ (cost-push shock)

Answer 7

Curve Shift: PC → up
Short-Run Effect: ↓ Y, ↑ π
Medium-Run Effect: CB raises i → π ↓, Y → Yₙ

Question 8

Consumer confidence ↓

Answer 8

Curve Shift: IS → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: CB lowers i → LM right, Y → Yₙ, π back to target

Question 9

Business investment ↓

Answer 9

Curve Shift: IS → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: CB lowers i → LM right, Y → Yₙ, π back to target

Question 10

Inflation expectations ↑ (πᵉ↑)

Answer 10

Curve Shift: LM → left
Short-Run Effect: ↓ Y, ↑ π
Medium-Run Effect: CB raises i → deeper ↓Y, then π ↓

Question 11

Inflation expectations ↓ (πᵉ↓)

Answer 11

Curve Shift: LM → right
Short-Run Effect: ↑ Y, ↓ π
Medium-Run Effect: CB lowers i → ↑ Y, π stabilises

Question 12

Money supply ↑

Answer 12

Curve Shift: LM → right
Short-Run Effect: ↑ Y, ↑ π
Medium-Run Effect: CB raises i later, π ↑ → then stabilises

Question 13

Money supply ↓

Answer 13

Curve Shift: LM → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: CB lowers i → π ↑, then stabilises

Question 14

Currency depreciation (imported inflation)

Answer 14

Curve Shift: PC → up
Short-Run Effect: ↓ Y, ↑ π
Medium-Run Effect: CB raises i → LM left, Y ↓, π ↓

Question 15

Currency appreciation

Answer 15

Curve Shift: PC → down
Short-Run Effect: ↑ Y, ↓ π
Medium-Run Effect: CB lowers i → LM right, Y ↑, π ↑

Question 16

Stock market crash

Answer 16

Curve Shift: IS → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: CB lowers i → Y ↑, π back to target

Question 17

Positive demand shock

Answer 17

Curve Shift: IS → right
Short-Run Effect: ↑ Y, ↑ π
Medium-Run Effect: CB raises i → LM left, Y → Yₙ, π ↑

Question 18

Negative demand shock

Answer 18

Curve Shift: IS → left
Short-Run Effect: ↓ Y, ↓ π
Medium-Run Effect: CB lowers i → LM right, Y → Yₙ, π ↓

Question 19

Positive supply shock (e.g. productivity ↑)

Answer 19

Curve Shift: PC → down
Short-Run Effect: ↑ Y, ↓ π
Medium-Run Effect: π ↓, CB stabilises i, Y → Yₙ

Question 20

Wage shock (higher bargaining power)

Answer 20

Curve Shift: PC → up
Short-Run Effect: ↓ Y, ↑ π
Medium-Run Effect: CB raises i → π ↓, Y → Yₙ