Answer to Question #279664 in Macroeconomics for Kaju

Question

how does the slope of IS-LM curve affect the impact of monetary and fiscal policy on output and rate of interest.

Answer 1

$Solution$

Money demand shifts to the right as income rises, and the interest rate rises to ensure that money demand equals money supply. As a result, the LM curve slopes upwards: increasing real GDP /output corresponds to higher interest rates.

An increase in the interest rate reduces anticipated investment spending and thus aggregate demand, the IS curve negatively slopes, lowering the equilibrium level of income. The reverse is true.