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Use multipliers for the IS-LM model to show the effect of automatic stabilizers on the effect...

  1. Use multipliers for the IS-LM model to show the effect of automatic stabilizers on the effect of an adverse demand shock on GDP. Also show the results using IS and LM curves.

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When there is an adverse demand shock means IS curve shifts to the left implies output and rate of interest falls. Over time price falls implies real money supply rises results in LM curve shifts to the right. Automatic stabilizers are tools that truncate the impact of the business cycle. When aggregate demand decreases, it leads to two things; one income taxes will decrease as income falls and transfer payments will increase like compensation to employees.

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