20 Questions
In the IS-LM model, what does the LM curve represent?
Equilibrium in the money market
What happens to the equilibrium in the IS-LM model when there's an increase in government purchases?
The equilibrium moves to point B
How can the IS-LM model be used to analyze the effects of a tax cut?
Shifts the IS curve to the right
What is the unique combination determined by the intersection of the IS and LM curves in the IS-LM model?
Equilibrium income and interest rate
How can the IS-LM model be used to analyze the impact of monetary policy?
Shifts the LM curve to the left
What happens to income and interest rate as a result of an increase in money supply, according to the IS-LM model?
Income rises and interest rate falls
In response to an increase in government spending, if the central bank holds the money supply constant, what happens to income and the interest rate?
Both income and the interest rate rise
If the central bank decides to hold the interest rate constant in response to an increase in government spending, what happens to the money supply, income, and the impact compared to holding money supply constant?
The central bank decreases the money supply, income increases by more, and the impact is greater than if the money supply was held constant
What are IS shocks in the IS-LM model?
Exogenous changes in the demand for goods and services
According to the IS-LM model, what happens when consumers use cash in transactions more frequently due to an increase in identity theft?
Income falls, interest rate rises, and unemployment rate increases
In the IS-LM model, when analyzing the effects of a tax cut, what happens to the LM curve?
It shifts to the right
If there is a decrease in government purchases in the IS-LM model, what happens to the equilibrium in the short run?
Income increases and interest rate decreases
When analyzing the impact of monetary policy using the IS-LM model, what happens if the central bank decreases the money supply?
LM curve shifts to the left
If there's an increase in government purchases and the central bank holds the money supply constant in response, what happens to income and interest rate?
Income increases, interest rate decreases
What happens to income and interest rate if there's a simultaneous increase in government purchases and money supply in the IS-LM model?
Income increases, interest rate increases
In the IS-LM model, what happens to income and the interest rate as a result of a housing market crash that reduces consumers' wealth?
Income falls and the interest rate rises
How does the IS-LM model predict the effects of consumers using cash in transactions more frequently in response to an increase in identity theft?
Income rises and the interest rate falls
What is the impact of holding the money supply constant in response to an increase in government spending, according to the IS-LM model?
Income falls and the interest rate rises
If the central bank holds the interest rate constant in response to an increase in government spending, what happens to income and the money supply, compared to holding 𝑴 constant?
Income rises and the money supply increases
What is the effect of an increase in 𝑮 on income and the interest rate if the central bank holds 𝒓 constant?
Income rises and the interest rate falls
Test your knowledge on Aggregate Demand, the IS-LM model, short run equilibrium, policy analysis, and shocks in the IS-LM model. Explore the equilibrium in the short run, the IS-LM curve, and the IS-LM model in relation to Aggregate Demand and Aggregate Supply (AD-AS).
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