Question

Using the IS-LM model, explain what could happen if the trust in bright future disappeared from capital markets. You can use some historical events as examples.

Answer 1

The capital market can help to create a better future for all by providing an efficient platform for companies and government to mobilize long-term capital to invest in the expansion of businesses and financing developmental projects by the government. If there is a lose of trust in the market, this will force people to access the money now anticipating for the reduction of money supply. This cause a shift in the LM curve outwards due to increased demand interest rates and income.