Question

Q1. "The equilibrium levels increase and interest rates change when either the IS or LM-curve shifts." Validate by
giving reason in support of your answer.
[10 Marks]​

Answer 1

The statement "The equilibrium levels increase and interest rates change when either the IS or LM-curve shifts" is valid, and it can be supported by the following reasons:

• 1. IS-curve shift: The IS (Investment-Saving) curve represents the equilibrium relationship between income and interest rates in the goods market. When the IS-curve shifts, it indicates a change in the factors that affect aggregate demand.
• If the IS-curve shifts to the right, it means that there is an increase in aggregate demand. This leads to higher equilibrium levels of income and output. To accommodate the increased demand, firms may borrow more to invest, causing an increase in interest rates.

• 2. LM-curve shift: The LM (Liquidity Preference-Money Supply) curve represents the equilibrium relationship between income and interest rates in the money market. When the LM-curve shifts, it signifies a change in the factors that affect the supply and demand for money.
• If the LM-curve shifts to the left, it means that there is a decrease in the money supply or an increase in money demand. This results in a higher demand for money at each interest rate, leading to an increase in interest rates to restore equilibrium.

• 3. Joint effects: When either the IS or LM-curve shifts, it can have a cascading effect on the other curve. For example, if there is an increase in aggregate demand (IS-curve shifts), it may lead to an increase in the demand for money (LM-curve shifts). This combined effect can result in higher equilibrium levels of income and output as well as increased interest rates.

Overall, the interaction between the IS and LM curves demonstrates how changes in aggregate demand and money supply/demand can impact equilibrium levels and interest rates in an economy.

To learn more about aggregate demand from the given link.

https://brainly.in/question/25302762

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