IS-LM Model and National Income Determinants

What does the IS curve represent in the IS-LM model?

The relationship between interest rate and total output for which the goods market is in equilibrium

What happens to equilibrium output when investment rises in the IS-LM model?

Equilibrium output falls

What is the significance of the downward sloping IS curve in the IS-LM model?

It signifies the negative relationship between interest rate and total output

What happens to planned investment spending as interest rate increases in the IS-LM model?

Planned investment spending falls Signup and view all the answers

In the IS-LM model, what does Point 1 in Panel C represent?

The resulting equilibrium of output Y corresponding to a particular interest rate Signup and view all the answers

What is represented by the line connecting the 3 points in Panel C of the IS-LM model?

The upward sloping IS curve Signup and view all the answers

What causes the IS curve to shift to the right from IS to IS2?

An increase in net exports (NX) Signup and view all the answers

What is the LM curve?

A curve that shows the relationship between nominal interest rate and real income level for which the money market is in equilibrium. Signup and view all the answers

What causes the LM curve to shift to the right?

An increase in nominal money supply (MS) Signup and view all the answers

What is the equilibrium point in the ISLM model?

When IS and LM curves intersect at point E Signup and view all the answers

What happens to the LM curve when there is a fall in real income Y3 to Y2?

The LM curve shifts to the right Signup and view all the answers

What is the relationship between interest elasticity of demand for money and effectiveness of monetary policy?

The more elastic the demand for money, the more effective monetary policy will be Signup and view all the answers

What happens to the effectiveness of monetary policy when the IS curve is perfectly inelastic?

Monetary policy becomes less effective Signup and view all the answers

In an ISLM model, which policy would lead to a greater change in real income?

Fiscal Policy with a steep IS curve Signup and view all the answers

In an ISLM model, what happens when there's a government deficit and LM is steep?

The government deficit results in complete crowding out of private investment Signup and view all the answers

Which factor would lead to a large change in real income in an ISLM model?

Increase in investment spending with flat IS curve Signup and view all the answers

What effect does an increase in government expenditure have on real income and interest rates in an ISLM model with a steep IS curve?

Large change in real income and small change in interest rates Signup and view all the answers