Week 4 - IS and LM Model

Question 1

IS

Answer 1

investment and saving

Question 2

LM

Answer 2

liquidity and money

Question 3

IS curve

Answer 3

• shows combination of interest rates and output where good market is at equilibrium
• the supply of goods must be equal to the demand for goods
• the more responsive consumption and investment is to interest rate changes, the flatter the IS curve
• represents the goods and services market

Question 4

right curve in IS curve

Answer 4

• a rise in government spending

Question 5

left curve in IS curve

Answer 5

• a fall in exports

Question 6

LM curve

Answer 6

• shows combination of interest rates and output where good market is at equilibrium
• the supply of money must be equal to demand for money
• represents money market equilibrium

Question 7

left curve in LM model

Answer 7

• money supply goes down
• price level goes up

Question 8

right curve in LM model

Answer 8

• money supply goes up
• price level goes down

Question 9

equilibrium in the IS LM model

Answer 9

• is found when the IS curve intersects the LM curve
• a point that lies on both curves represents an equilibrium in both the goods market and the money market

Question 10

Central banks

Answer 10

• monitor fiscal policy to see what effects they might have on inflationary pressures in the economy
• if the government reduces taxation to boost economic activity, IS curve will shift to the right