The IS-LM model

Question 1

What causes shifts in the IS curve?

Answer 1

Increase in autonomous spending, e.g. I, XM, G increase/tax cuts (spending that must be done regardless of level of income in economy)

Fiscal policy shifts the IS curve to the right

Question 2

What provokes a shift in the LM curve?

Answer 2

An increase in the real money supply/reduction in real money demand shifts the LM curve rightwards

Monetary policy shifts the LM curve rightwards

Question 3

What does the LM curve show?

Answer 3

Shows all the combo’s of GDP and IR for which the real money demand = real supply

Question 4

What does the IS curve show?

Answer 4

Shows all combo’s of GDP and IR for which aggregated expenditure (AE) = actual output (Y)

Question 5

Define ‘flow’ and ‘stock’ variables + give examples

Answer 5

Flow = over a period of time, e.g. income, investment

Stock = one point in time, e.g. wealth, human capital

Question 6

Liquidity

Answer 6

The ease with which an asset can be turned into money

Question 7

Present value (PV)

Answer 7

The current value of a future sum of money/stream of cash flows given a specified ROR

Question 8

How do we calculate the PV?

Answer 8

Amount paid/(1+decimal IR)^n years

Question 9

Demand for money

Answer 9

Amount of wealth everyone in economy wishes to hold in the form of money balances (cash + checking out deposits)

Question 10

How do we calculate the D for money?

Answer 10

Transactions (payments) and precautionary (what if?) D for money + speculative (assets hedge) D for money