IS-LM model and macro policy

Question 1

What does an increase in autonomous spending do?

Answer 1

Shifts the IS curve to the right and raises the equilibrium values of both GDP and the interest rate

Question 2

what does an increase in real money supply, or decrease in money demand do?

Answer 2

It shifts the LM curve rightwards

Question 3

What is the monetary transmission mechanism?

Answer 3

The transmission of a monetary shock (change in money supply/demand) into an effect on real spending or the interest rate

Question 4

How does the demand or supply of money change interest rate and GDP?

Answer 4

• Money demand/supply change leads to an attempt to buy/sell bonds
• This causes a change in investment/interest sensitive spending
• This changes aggregate spending