1.In the IS-LM model, if there is a positive exogenous shock to investment, what
ID: 1162588 • Letter: 1
Question
1.In the IS-LM model, if there is a positive exogenous shock to investment, what happens to income (Y) and the rate of interest (r)
? r rises, Y rises
r rises, Y falls
r falls, Y rises
r falls, Y falls
In the IS-LM model, if there is a positive exogenous shock to consumption, and the fiscal authority wants to stabilize output, what policy could it undertake?
increase money supply
reduce government expenditures
reduce taxes
decrease money supply and taxes at the same time
In an usual IS-LM framework, the government increases taxes and government expenditures simultaneously. Which direction does the IS curve shift?
rightward
leftward
stays same
cannot say
increase money supply
reduce government expenditures
reduce taxes
decrease money supply and taxes at the same time
In an usual IS-LM framework, the government increases taxes and government expenditures simultaneously. Which direction does the IS curve shift?
rightward
leftward
stays same
cannot say
Explanation / Answer
a) With a positive exogenous shock, the IS curve will shift to the right at a higher output and higher interest rates. It will also increase the income. The answer is I (interest) rises and the Y (output) rises.
b) The government will reduce the expenditure. It will stabilise the output in the economy.
c) Cannot say. An increase in the taxes will shift the IS curve to the left and increased government expenditure will shift the curve to the right. The actual position will only be determined after knowing the exact value of the taxes and expenditure.
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