Consider a closed macroeconomy with and , all constants positive and . Suppose the interest sensitivity of the IS curve (parameter ) increases, accompanied by an increase in the interest sensitivity of the LM curve (parameter ) by exactly the same proportion. As a result,
Tap an option to check your answer.
Checking your account…
Consider a closed macroeconomy with Y = C₀ + c(Y - τ Y) - α r + G₀ and M₀ = KPY - β r, all constants positive and c, τ ∈ (0,1). Suppose the interest sensitivity of the IS curve (parameter α) increases, accompanied by an increase in the interest sensitivity of the LM curve (parameter β) by exactly the same proportion. As a result, (A) the AD curve will be steeper but there will be no shift of the entire curve (B) the entire AD curve will shift to the right and it will also be steeper (C) the entire AD curve will shift to the right with no change in its slope (D) there will be no change in the AD curve (neither any change in its slope, nor a shift)
Also written as: Consider a closed macroeconomy with Y = C_0 + c(Y - tau Y) - alpha r + G_0 and M_0 = KPY - beta r, all constants positive and c, tau in (0,1). Suppose the interest sensitivity of the IS curve (parameter alpha) increases, accompanied by an increase in the interest sensitivity of the LM curve (parameter beta) by exactly the same proportion. As a result,
IS-LM model has come up 137 times in 7 exams since 2004.
This question is on Deriving aggregate demand from IS-LM, part of IS-LM model in Macroeconomics.
How varying the price level in IS-LM traces out the aggregate demand curve.
TestStop has 9 past-paper questions on this subtopic; the nearest in year are below.
Question from the DSE 2018 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.