Hypothetical Situations
Reverse COVID: What would happen to the interest rate if everyone were employed and productive?
IS shifts right
Increased employment leads to increased income which leads to increased consumption which leads to increased employment. Output would increase drastically, which means interest rates would also increase.
What if WW3 started, and men, women, children, and pets (search & rescue dogs, horses) were entered into the draft and the government implements wartime bonds to help pay for the war?
IS shifts right, LM shifts up
Wartime monetary policy means increased interest rates because the government wants people to buy war bonds. Government spending would increase during the war, and employment rates would also increase.
What if the nuclear bomb hadn’t been invented and WW2 lasted another 5 years?
IS shifts right, LM shifts up
Many more resources would have been used up and produced. Output would increase and the interest rate would increase, too.
What if the legal gambling age moved to 12?
LM shifts right
People would go into debt since they’re betting more than they have, and they don’t have accurate concepts of money and numbers. People’s credit scores would go down, which makes it harder to borrow money. Lenders would compensate for the lack of income through interest by raising interest rates for those that do borrow money.
What if the Boss Baby were real and everyone knew the government/world was run by babies?
IS shifts left
People wouldn’t take the babies seriously and would start saving more than spending due to uncertainty about how babies handle their money (decreased trust in government). Consumption decreases, which shifts the IS curve left, meaning a decrease in interest rate.