IS-LM Model (Closed Economy)

Question 1

What does the IS curve represent?

Answer 1

Equilibrium in the goods market; downward sloping (as interest rates ↓, investment ↑, output ↑).

Question 2

What does the LM curve represent?

Answer 2

Equilibrium in the money market; upward sloping (as income ↑, demand for money ↑, interest rates ↑).

Question 3

How does expansionary fiscal policy affect the IS-LM model?

Answer 3

IS shifts right → higher output and interest rates.

Question 4

What’s the crowding-out effect?

Answer 4

Gov’t spending ↑ → interest rates ↑ → private investment ↓.