Question
Please try ! thanks 1) For lower interest part, I thought investment os mpre volatile than the consumption? Consumers become worried that the Hicksonian President
Please try ! thanks
1) For lower interest part, I thought investment os mpre volatile than the consumption?
Consumers become worried that the Hicksonian President will take them out of a series of trade deals and damage the economy, reducing expected future income.
This is essentially the reverse of the answer to the previous question. Lowermeans a reduction in consumption, shifting the IS curve downwards. Lower income means that in order for the money market to balance a lower interest rate must prevail. This lower interest rate means investment increases, but not by as must as consumption has fallen. In order to keep interest rates constant the central bank would need to reduce the money supply, further reducing output.
2)
The answer talks about the LM curve, why cant the IS changes
The introduction of easier payment methods (contactless, mobile payments) means that people carry less cash.
The reduced demand for money shifts the LM curve downward since, at any given level of income and money supply, the interest rate must be lower to achieve money market equilibrium. This raises the level of investment and income. Consumption too increases as income increases. To keep interest rates constant the central bank must reduce the money supply.
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