Interest Rates Affects on the Is-Lm Model Essay

ap stagecoachment 4 5. According to the IS-LM model, what happens to the arouse rate, income, consumption and invest under the by-line circumstances. a. The central bank attachs money publish. An add-on in the money wide awake shifts the LM curve downward. The equilibrium moves from point A to point B. Income rises from Y1 to Y2 and the gratify rate falls from r1 to r2. Therefore this increase in money supply causes a decrease in enliven rate, an increase in income, an increase in consumption and an increase in investing. LM Income, output, Y b. governance increases government purchasesAn increase in government purchases result in a shift in the IS curve to the right. The equilibrium moves from point A to point B. Income rises from Y1 to Y2 and sake rate rises from r1 to r2. This increase in government purchases therefore causes quest rate to rise and income likewise rises. Consumption will also increase but the increase in government purchases will cause investment to dec rease. interest rate, r LM IS2 IS1 Income, output, Y c. The government increases taxes. An increase in taxes shifts the IS curve to the left. The equilibrium moves from point A to point B.Income falls from Y1 to Y2 and the interest rate from r1 to r 2. Therefore increase in taxes will bring about a decrease in interest rate, cause income to also decrease which will decrease consumption also but will result in an increase in investment. interest rate, r LM IS1 IS2 Income, output, Y d. The government increase government purchases and taxes evenly 6. Consider the following economy of Hicksonia. a. The consumption function is given by C= 200 + 0. 75 (Y T) The investment function is I= 200-25r establishment purchases and taxes are both 100.