MCU
Thanos snaps away half of all life in the United States of America. How does this affect interest rates and output?
The IS curve would shift dramatically to the left; at any given interest rate i, consumption and investment would have dropped precipitously. As a result, the IS-LM equilibrium would slide down the LM curve, dramatically decreasing income and also reducing interest rates as money demand decreases.
Thanos has just snapped away half of all life in the USA. Tony Stark says that he will fund the rebuilding of all major US cities, and every single investment firm in America follows his lead. But the Fed decides to hold rates steady. What happens to the IS-LM equilibrium?
Tony Stark and all the investment firms massively increases spending leads to a surge in private investment i, which shifts the IS curve to the right: at any given interest rate, output will be higher as firms are putting more money into rebuilding. But, because the fed is holding rates steady, it means expanding money supply, which shifts LM down just enough to accommodate the higher demand for money that comes with rising income (keeping interest rates unchanged). So, incomes rise and interest rates remain steady.
The Hulk loses control during a Senate hearing and goes on a rampage throughout the East Coast of the USA. He destroys 3 major ports, multiple oil refineries, and railroads. As a result of the subsequent inflation, the Fed raises interest rates. What happens?
The destruction would significantly discourage investment and consumption shifting the IS curve to the left. The increase of interest rates would shift the LM curve up. Both shifts would reduce income. The IS shift would lower i, but the LM shift counteracts this. Rising interest rates and reduced income means that Hulk messed up the economy.
Following Captain America’s death, the US government holds a year-long period of national mourning. Congress raises taxes by 5% to fund a mega memorial for him. Consumer confidence vastly increases due to patriotism. Congress also passes a huge defense bill. The Fed holds rates steady.
The tax hike slightly shifts IS left, but the surge in consumer confidence and the massive defense bill overwhelm it, resulting in an overall rightwards shift of IS. Since the Fed holds steady, it expands the money supply, shifting LM right to match. Long story short, income rises while interest rates stay steady.
Doctor Strange tears open the multiverse and introduces multiple different variants of Earth. They bring new technology, increasing the productivity of workers. Firms expect higher future profits and expand investment. Households anticipate higher lifetime income and increase consumption. The Fed does not intervene. What happens?
The productivity shock increases how much output each worker can produce and the expected returns for firms. Because firms expect higher returns on capital, they increase investment spending. Households also expect higher lifetime income and increased current consumption. This will shift the IS curve to the right. Since the Fed does not intervene, the nominal money supply remains fixed, and the LM curve remains. As output rises due to the IS shift, income increases, leading to higher demand for money as people consume more. As the money supply remains unchanged, interest rates will go up. This means we would see an overall higher output and interest rates.