Answer to Question #293909 in Macroeconomics for Travis

Question

Last week the Monetary Policy Committee increased the Repo rate by 25 basis points.

1.1 Use the IS-LM-BP model and explain the impact of this decision on equilibrium interest rates

and output. Explain the short-, medium- and long-run impacts

Answer 1

Income is reduced, and the interest rate is raised when the money supply is reduced. Consumption decreases as disposable income decreases, but investment decreases as the interest rate rises. Given the level of real GDP, we may deduce that a rise in the accurate stock of money decreases the interest rate. Furthermore, given the stock of money, real GDP increases the interest rate. This is another method of expressing the upward sloping nature of the LM curve.