Answer to Question #286702 in Macroeconomics for Msb

Question

a. Suppose that the government wants to raise investment but keep output constant. In the 

IS–LM model, what mix of monetary and fiscal policy will achieve this goal?

b. In the early 1980s, the U.S. government cut taxes and ran a budget deficit while the Fed 

pursued a tight monetary policy. What effect should this policy mix have?

Answer 1

a)We must lower the actual interest rate in order to increase investment. As a result, we must pursue a policy that pushes the LM curve to the right, i.e., a loose, expansionary monetary policy.

This will result in a lower real interest rate, increased investment, and a more stable IS curve.

as well as increased output To keep output at the same level as before, we'll have to cut spending. Move the IS curve to the left in the economy. This can be accomplished, for example, by lowering the government's spending . A loose monetary policy and a strict fiscal policy would be beneficial.

B)IS moves to the right 

LM moves to the left 

The interest rate is unmistakably rising.

Depending on the relative magnitudes of the IS and LM shifts, Y could increase or decrease.