Question

*Plagiarism is intentionally failing to give credit to sources used in writing and is a disciplinary offence*. 2. a). How is the IS curve affected by (i) an increase in labor supply, (ii) an increase in money supply, (iii) an increase in government spending? Explain your answer. b). How is the LM curve affected by (i) an increase in labor supply, (ii) an increase in money supply, (iii) an increase in government spending? Explain your answer.

Answer 1

2) a. (i) An increase in the labour supply would lead to an increase in the money supply in the economy and thus it causes the IS curve to shift towards the right. An increased labour force would mean that the investment and the production are higher and thus it means a better national income which would increase the savings in the economy.

(ii) An increased money supply would cause the IS curve to shift towards the right. With increased money supply in the economy, the investment patterns would be improved and this causes the net income of the economy to improve and hence an increased money supply would result in shifting the IS curve to the right.

(iii) With increase in the government expenditure, the IS curve would shift to the right. With increase in the government expenditure in the market, the investment patterns are expected to be boosted and this causes the national income to be boosted and hence causes a rise in the income of the economy.

b. (i) The LM curve would shift towards the right as the increase in the labour force would lead to increase in the money supply in the economy

(ii) An increase in the money supply causes the LM curve to shift towards the right. An increase in the money supply would result in lowering then interest rate at any given output level and hence would increase the investment patterns of the economy.

(iii) With increased government spending, the aggregate demand for goods is greater than the aggregate supply for goods and the inventory of the firms would be reduced as a response to the increased prices. The workers would have to be provided with higher nominal wages so as to maintain the real wages on a constant scale and hence the overall wages and hence the prices would increase. This causes the LM curve to shift up and to the left