Question

Use the IS-LM model to explain how the stock market impact of a surge in consumer confidence depends on the response of the central bank.

Answer 1

IS-LM model stands for investment, saving, liquidity, money and how they impact each other. The stock market's impact of a surge in consumer's condifence depends on the response of the central bank as, the central bank of any nation decides it's monetary policy which impacts the liquidity of money in the market. Contractionary monetary leads to less money supply in the market hence, lower investment in stocks. And expansionary monetary policy leads to more money supply in the market, hence, more investment in the stocks.