Answer to Question #276413 in Macroeconomics for gudwill

Question

For each of the following, determine whether the IS curve, the LM curve, both curves or neither curve shifts. In each case, assume that expected current inflation and future inflation are equal to zero, and that no other exogenous variable is changing.

a.     A decrease in the expected future real interest rate.

b. A decrease in the current short-term nominal interest rate.

c.    An increase in expected future taxes.

d.     A decrease in expected future income.

Answer 1

a) A fall in the predicted future real interest rate causes the IS curve to move to the left. As projected, interest rates will fall, which will benefit investors by increasing the supply of speculative demand for money. Reduced interest rates mean lower borrowing costs, which will lead to more investment in the economy.

b) A steeper yield curve will cause the LM curve to move to the left. A steeper yield curve means a higher interest rate in the short run. This negatively influences speculative money demand since higher interest rates reduce demand for securities.

b) A rise in the current money supply will cause the LM curve to move to the right. As the monetary base expands, the output is predicted to rise as money becomes more readily available.

d) A shift in the LM curve to the left is caused by an increase in the predicted future money supply. The expected increase in future money supply will influence future investment levels since interest rates will rise as the economy's liquidity increases. Because of the higher estimated cost of assets due to the rising interest rate, speculative demand for money will decline.