Answer to Question #187839 in Macroeconomics for Faisal

Question

1)Show the equilibrium of SI and LM graphically and numerically?

2)Show the changes in the graph of;

• a decrease in government spending

• an increase Tax

3) Explain graphically the monetary policy change in the equilibrium IS and ML

4)What are the reasons of factor that shift both IS and ML curves

5)write down the shift factors of fiscal and monetary policy?

Answer 1

1) The IS curve depicts the set of all levels of interest rates and output (GDP) at which total investment (I) equals total saving (S). The LM curve depicts the set of all levels of income (GDP) and interest rates at which money supply equals money (liquidity) demand.

The intersection of the IS and LM curves shows the equilibrium point of interest rates and output when money markets and the real economy are in balance.

2) A decrease in government spending will shift IS curve to the left.

An increase in Tax will shift IS curve to the left.

3) The expansionary monetary policy will shift the LM curve to the right, and contractionary monetary policy will shift it to the left.

4) The LM curve, the equilibrium points in the market for money, shifts for two reasons: changes in money demand and changes in the money supply.

Fiscal stimulus, that is, increasing government spending and/or decreasing taxes, shifts the IS curve to the right, raising interest rates while increasing output.

5) Shift factors of fiscal policy are the change in government spending or taxes.

Shift factors of monetary policy are the change in reserve ratio, open-market operations, changes in money supply.