Question

Thoroughly explain and analyze Financial crisis 2009 in US with IS-LM model in short run and...

Thoroughly explain and analyze Financial crisis 2009 in US with IS-LM model in short run and long run, if there were no stabilization policies implemented.

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Answer #1

In times of recession, consumer and investor confidence (animal spirits) are affected, that is, there is a decrease in consumer spending and/or demand for goods and services which leads to a fall in output to a low level (from Y* to YR) and a fall in the rate of interest (from r* to rR), and a leftward shift in IS (from IS1 to IS2). For stabilization, government spending or fiscal stimuli lead to a rightward shift in the IS to restore the initial output level.  

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