Question

Use the IS-LM model to graphically illustrate the impact of a sudden decrease in demand for money (due to an increase in the use of internet banking) on the output and interest rate in an economy in the short run. Write down the impact on Y, C, U and I.

Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium levels; iv. the direction the curves shift; and v. the new short-run equilibrium.

Answer #1

Ans

Due to decrease in the money demand LM curve shift to the left. from LM to LM'

Initial equilibrium is at point 1, with output Y0 and interest i0

Due to the shift of LM curve, output decrease to Y1 and interest rate increase to i1.

Consumption will also fall. Due to increase in interest rate people like to save more and consume less.

Investment will also fall, bcoz interest rate os increased. so cost of investment is increased.

Note: I dont understand what U stands for Here.

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