What are the qualitative effects in the IS LM model of a) an increase in firms o

Question

What are the qualitative effects in the IS LM model of a) an increase in firms optimism about future profits b) a sudden improvement in banking technology that makes cheques clear two days faster c) a wave of credit card fraud that leads people to use cash for purchases more often d) a baking crisis that diminishes banks willingness to accept deposits e) a sudden military spending program    What are the qualitative effects in the IS LM model of a) an increase in firms optimism about future profits b) a sudden improvement in banking technology that makes cheques clear two days faster c) a wave of credit card fraud that leads people to use cash for purchases more often d) a baking crisis that diminishes banks willingness to accept deposits e) a sudden military spending program   

Explanation / Answer

The real business cycle model assumes that all consumers will maximize their utility subject to constraints and moreoever they seek to maximize their intertemporal utility through substitution over time. The model is also characterized by exogenous productivity shocks and rational expectations on the part of all individuals. If total factor productivity is expected to increase in the future, then equilibrium output will be expected to rise as firms rationally expect greater future efficiency. This will also correspond to higher real wages as the marginal productivity of labour increases.

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