Lazlo And Alex
The year is 1958 and the wok economy in Tibet is booming. The kitchen appliance company, Yosukata ©, is very trendy at the moment, controlling most of the international market, and has an extreme gain in demand from previous years. How does this change R, Y, and the ISLM curve.
Answer: This is a demand shock, meaning that it would only affect the IS curve, shifting it to the right, leading to higher interest rates and output. R and Y both increase.
The US suddenly goes through a period of high inflation, increasing the inflation rate from 3% to 10%. Because of this, the Fed shrinks money supply. What effect does this have on r, y, and the ISLM curve?
This shifts the LM curve and not the IS curve.The LM curve shifts to the left, as for every level of output you need a higher interest rate. Interest rates (r) go up, and output (y) goes down.
OMOs sell $100 billion of bonds, then the government uses that money to develop a sixth-gen fighter jet. How does this affect R and Y? How does the ISLM curves shift?
We don’t know if Y increases or decreases for everyone, the R also increases because of the lower MS. The IS curve shifts right and the LM curve shifts left.
Lazbdey © is a domestic conglomerate that controls most of market in construction, tech, and defense contracting. It goes under 😔. How does this affect R and Y, and shift the ISLM curve?
This does not affect R, but Y goes down because a big part of it ceases to exist. The IS curve shifts left while the LM does nothing.
The USFG establishes a major tax increase just for the top 10% of the economy, and a major tax cut for the bottom 10%. The rest receive a minor tax cut. What effect does this have on R and Y? What changes does this make to the ISLM curve?
Overall, since the top 10% spends far more than the bottom 10%, it’s likely that taxes overall go up. If that’s the case, the IS curve shifts to the left, as output would be lower and interest would also be lower. Here, if the overall tax rate did not change, and just affected the distribution of income, then none of the curves would be affected.