is-lm problem set

1/ How did covid affect interest rates and output? How did the government response(s) then
affect interest rates and output?

a/

• $C\downarrow$ → consumption falls ($IS$ left)

• $M^d\downarrow$ → money demand falls ($LM$ down)

• output decreases with lower $C$

• $i$ equilibrium decreases based on curves moving

b/

• government response

  • $G\uparrow$ → government spending increases for stimulus etc ($IS$ right)
  • $M^s\uparrow$ → stimulate demand helping economy ($LM$ down)

• output increases with increased $G$

• $i$ seems to stay the same in new equilibrium

2/ How would a wave of immigration affect interest rates and output?

• $Y\uparrow$ → immigrants increase economy output ($IS$ right)

• $T\uparrow$ → taxation rises with more immigrants, less than $Y\uparrow$ though ($IS$ left)

• $M^d\uparrow$ → demand for money increases with more people ($LM$ up)

• output increases with increased $Y$

• $i$ increases in new equilibrium

3/ What effect would a sudden spike in automation have on interest rates and output?

• $Y\uparrow$ → output suddenly increases ($IS$ right)
• $C\uparrow$ → consumption would likely increase with more goods ($IS$ right)

• output increases with $Y\uparrow$ and $C\uparrow$
• interest increases with $IS$ moving

4/ How would alien contact affect interest rates and output?

• (assuming the aliens possess deadly weapons)

• $Y\downarrow$ → output falls as people desire spending their life on non-work stuff ($IS$ left)

• $C\uparrow$ → people spend money for prep, but cannot be sustained so less than $Y\downarrow$ ($IS$ right)

• $M^d$ → people attempt to get more secure liquid money ($LM$ up)

• output falls as $Y$ goes down

• interest rate seems relatively the same

5/ What is something besides a change in monetary policy or banking laws that could shift the LM curve?

• changing the price level $P$ would shift the $LM$ curve, since the curve is based on $\frac{M}{P}$ instead of just $M$ alone