Question

A) What relationship does the IS curve plot? Explain, in words and graphically, why the IS...

A) What relationship does the IS curve plot? Explain, in words and graphically, why the IS curve slopes downward. Be sure to label the graph properly.

B) What relationship does the LM curve plot? Explain, in words and graphically, why the LM curve slopes upward. Be sure to label the graph properly.

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Answer #1

A) IS curve represernt different combination of income and interest rate where goods market is in equilibrium.

IS curve is negatively sloped because higher level of interest rate reduces investment spending and thereby reduces equilibrium level of income.

B) LM curve represents different combination of income and interest rate at which money market is in equilibrium Equilibrium in money market requires equality of demand for money and supply of money.

LM curve is positvely sloped which means that money market equilibrium is attained at higher Y and higher i. Slope of LM is numerically equal to k/h.

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