L20 - The IS-LM Model and Macroeconomic Policy

Question 1

What are the assumptions of the IS-LM Model?

Answer 1

• Prices are fixed
• Because prices are constant Real and Nominal
  Interest are the same
• Assume closed economy

Question 2

What does IS and LM depend on?

Answer 2

IS depends on:
-Real rate of interest

LM depends on:
- The money rate

Question 3

What is the monetary transmission mechanism?

Answer 3

Refers to the transmission of a monetary shock, such as change in the demand for or supply of money, causing an effect on real spending or changes in interest rate

Question 4

What is the link between LM and IS?

Answer 4

Through the interest rate:

-A change in the demand for or supply of money leads to an attempt to buy or sell bonds, which causes the interest rate to change.

-In turn causes a change in investment, and in all other
interest-sensitive spending.

-in turn changes aggregate spending. In the new equilibrium, both the interest rate and GDP are changed.

Question 5

ALL THE GRAPHS ARE ON NOTES

Answer 5

…..