Realistic
The US government announces it will fully fund universal pre-K childcare starting next year. What happens to interest rates and output?
Interest rate (i)↑ rises, Output (Y)↑ increases
----------------------------------------------------------
G↑ directly — government funds childcare program
More parents (esp. mothers) re-enter workforce → labor supply↑ → wages↓ slightly, but C↑ from dual incomes
Businesses invest in childcare facilities → I↑
IS shifts right
LM unaffected (no change in money supply or price level)
Output (Y)↑ increases
Interest rate (i)↑ rises
IS right with fixed LM → classic crowding-out: higher G bids up interest rates
Scientists discover that eating one specific mushroom gives humans the ability to photosynthesize sunlight for energy. What happens to interest rates and output?
Output (Y)↑ increases, Interest rate (i) ~ ambiguous
----------------------------------------------------------
Food spending (~10–15% of income) is freed up → massive C↑ on other goods
Food & agriculture industries collapse → I↓, employment↓ in that sector
Net: consumer spending surge in non-food sectors dominates → IS shifts right
Food prices collapse → overall price level↓ → real money supply↑ → LM shifts right
Output (Y)↑ increases
Interest rate (i) ~ ambiguous
Both curves shift right → output clearly rises; IS right pushes i up, LM right pushes i down
The US passes a law requiring all coal power plants to be replaced by offshore wind turbines within 5 years. What happens to interest rates and output?
Output (Y)↑ increases, Interest rate (i)↑ rises
----------------------------------------------------------
Massive I↑ — firms must build turbines, grid infrastructure, decommission coal
G↑ — subsidies, permits, offshore leasing → IS shifts strongly right
Energy costs rise during transition → operating costs↑ for firms → slight price level↑ → real money supply↓ → LM shifts slightly left
Coal workers lose jobs short-run → C↓ slightly, but offset by new green jobs
Output (Y)↑ increases
Interest rate (i)↑ rises
Large IS right shift dominates; small LM left adds upward pressure on i
If humans suddenly stopped needing sleep, what effect would this have on interest rates and output?
Output increases, Interest rates rise
-------------------------------------------------------------
Consequences:
Workforce productivity doubles overnight → output/income → C↑
Firms invest big in the new capacity → I↑
Night economy explodes → C↑ further, I ↑
Price levels might rise from surge in demand → LM shifts left slightly
Clearly IS will shift right because of increased consumption and investment.
Massive demand surge across the economy → prices rise → real money supply shrinks → LM shifts left slightly
Result:
Output obviously increases (the IS shift dominates over the slight LM left shift)
Interest rates rise (both shifts increase rates)
What effect would a federal abortion ban have on interest rates and output?
Interest rates ambiguous, output would decrease.
-------------------------------------------------------------
Consequences:
Higher birth rate over time → larger future population → C increases
More women exit or reduce workforce (childcare burden), less disposable income → C decreases
Healthcare costs go up for families → disposable income ↓ → C decreases
Possible business relocation out of affected states → investment decreases
Government may increase spending on child welfare, foster care, etc. → G ↑
Price levels: not sure — the G↑ could push prices up slightly
In short run, however, C and I decreases would likely dominate and won’t be offset by G increase → GDP decreases and IS curve would shift left
If prices shift left because of government spending:
Real Money Supply = Nominal Money Supply / Price Level
So if the price level goes up but the Fed doesn't print more money, the real money supply shrinks → the same number of dollars buys less stuff and supports less economic activity → LM curve would also shift left
So, all in all, the output would DECREASE because both IS and LM would shift left.
Interest rates: ambiguous (both curves shift left, which has opposing effects on the interest rate), so i would likely stay around the same.
What effect would a Severance-esque world have on interest rates and output? Ie. you literally have an innie and an outie and so you basically double the population to half that works and half that doesn’t.
Y↑ substantially, i ambiguous
----------------------------------------------------------
Consequences:
Workers become dramatically more productive because workplace stress no longer affects personal life → productivity ↑ → I↑
But social unrest may reduce consumer confidence → C↓
Governments regulate the world heavily → G↑
If workers psychologically disconnect from work, labor bargaining power may weaken → wages ↓ → C↓ for some households
Net effect: investment boom probably dominates → IS shifts right
Higher income and business activity increase money demand → LM shifts left
But if productivity growth lowers prices, real money supply rises → LM shifts right
So LM effects are ambiguous:
New equilibrium: IS definitely shifts right → output likely rises strongly, Interest rates ambiguous because LM direction is uncertain
Likely result:
Y↑ substantially
i ambiguous depending on whether productivity or money demand effects dominate
How would Ukraine winning the war affect interest rates and output in the EU?
Y↑ strongly, i changes only slightly or ambiguously depending on central bank response
-------------------------------------------------------------
War uncertainty in Europe falls → consumer and investor confidence rises → C↑, I↑
Energy and food supply chains stabilize → production costs fall → I↑, C↑
European reconstruction begins → massive infrastructure demand → I↑, G↑
There’s a sense that we’ve deterred Russia and another attack is unlikely → G↓
Oil/gas prices likely fall because of reduced geopolitical risk → inflation falls → real money supply rises
Trade routes become safer and cheaper → NX↑ for Europe/global trade activity ↑
Net effect: confidence + reconstruction + lower energy costs probably dominate → I↑ strongly and C↑ → IS shifts right
Lower inflation from cheaper energy increases real money balances → LM shifts right
Less precautionary demand for money during uncertainty → money demand falls → LM right again
New equilibrium: IS right + LM right → output definitely rises; Interest rates are ambiguous:
IS right pushes i upward
LM right pushes i downward
Likely result:
Y↑ strongly
i changes only slightly or ambiguously depending on central bank response
Jurassic Park succeeds and opens worldwide. Real, living dinosaurs are now a global tourist attraction. What happens to interest rates and output?
Output (Y)↑ increases, Interest rate (i)↑ rises
----------------------------------------------------------
Enormous I↑ — park construction, containment, biotech, security, hotels globally
Tourism C↑ massively — once-in-a-lifetime travel demand explodes
New industries emerge: dino-medicine, dino-documentary, merchandise → I↑, C↑
IS shifts right.
Massive demand → prices rise → real money supply↓ → LM shifts slightly left.
(Assume no T-Rex escapes, otherwise IS would shift back left very quickly 🦖)
Output (Y)↑ increases
Interest rate (i)↑ rises
How would widespread student debt forgiveness affect interest rates and output?
i↑ significantly, Y probably rises
-------------------------------------------------------------
Households with debt have higher disposable income → C↑
Young consumers buy more homes/cars/start businesses → I↑, C↑
Government absorbs debt costs → budget deficit rises → G↑ indirectly / government borrowing ↑
Some people may expect future forgiveness and borrow more → not really sure what that does but it seems bad.
Banks lose out on loan income, which is bad for their ability to hire and thus serve more people, meaning less people get the normal kind of loans → small C↓
Net effect: consumption surge likely dominates → IS shifts right
Higher spending raises transaction demand for money → money demand ↑ → LM shifts left
If markets expect inflation from stronger demand, real money supply effectively falls → LM left again
New equilibrium:
IS right + LM left → interest rates definitely rise
Output effect ambiguous because the curves oppose each other
Likely result:
i↑ significantly
Y probably rises in short run if consumption effects are strong enough
What effect would the discovery of a cancer cure have on interest rates and output?
Output effect is ambiguous, Interest rates for sure will fall
-------------------------------------------------------------
Consequences:
Healthcare spending (huge chunk of GDP) collapses → I↓, G↓
But productivity rises because healthy people work more → C↑, I↑
Life expectancy increases → people save more for longer retirement but also work more and earn more → C↓ in short run but ↑ in the long run → ambiguous
Pharmaceutical/hospital industry shrinks massively → I↓, C↓
But new biotech industries emerge around longevity and making cancer cure more accessible or better → I↑, C↑
Net effect: the collapse of existing healthcare infrastructure probably outweighs new industry growth in the short run → I↓ net
So for IS: the G↓ and I↓ likely dominate in the short run for effects → IS shifts left
LM curve:
Healthcare was one of the most expensive sectors in the economy
Its collapse means the price of a huge amount of goods and services drops
Real money supply increases → LM shifts right
New equilibrium:
IS left + LM right → output effect is ambiguous because they oppose each other
Interest rates for sure will fall (both shifts cause i to decrease)