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Eia1009 - Tutorial 6

This document summarizes the factors that shift the IS and LM curves. It explains that the IS curve can shift right due to an increase in government spending, a decrease in taxes, or an autonomous increase in investment. The IS curve shifts left due to the opposite factors. The LM curve shifts right with an increase in money supply or decrease in money demand. It shifts left with a decrease in money supply or increase in money demand. Government spending, taxes, investment, money supply, and money demand are therefore the key factors that can cause the IS and LM curves to shift position.

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71 views

Eia1009 - Tutorial 6

This document summarizes the factors that shift the IS and LM curves. It explains that the IS curve can shift right due to an increase in government spending, a decrease in taxes, or an autonomous increase in investment. The IS curve shifts left due to the opposite factors. The LM curve shifts right with an increase in money supply or decrease in money demand. It shifts left with a decrease in money supply or increase in money demand. Government spending, taxes, investment, money supply, and money demand are therefore the key factors that can cause the IS and LM curves to shift position.

Uploaded by

zaim ilyasa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EIA1009

MACROECONOMICS 1
TUTORIAL 6

The Answer of OCC2.10


1. Construct the IS and LM curves.
In this section, it explains that construction of the IS and LM curves.
Fristly, it expresses the construction of the IS curve. As premises for it, the
condition for equilibrium in the product market consists of two equation;
Y =C + I+ G ( 1 ) , I +G=S +T ( 2)
In fact, IS schedule is constructed from equation (2) without government sector (
G=0 ,T =0 ), and equation (2) is rewritten;
I ( r )=S (Y ) (3)
Equation (3) indicates I depends on r while S depends on Y , this below Figure 1 is to
show the IS curve.

Secondly, it expresses the construction of the LM curve. For money demand, it


depends on income positively (transactions demand) and interest rate inversely
(speculative demand). As equation from these points,
d d
M =L ( Y , r ) ( 4 ) , M =c 0 +c 1 Y −c 2 r c 1 >0 ; c 2 >0(5)
Thus, LM schedule shows all possible combinations of Y (income) and r (interest rate)
that equilibrate money demand (L) with a fixed money supply (M ). Consequently, for
money market to be in equilibrium, the LM schedule can be expressed;
d d
M 0 =M =c 0 +c 1 Y −c 2 r (6)
As a result, this below Figure 2 is to show the LM curve.
2. What are the factors that shift IS and LM curves?
In this section, it presents the factors that shift IS and LM curve.
Firstly, it presents the factor that shift the IS curve. For the IS curve, the
government sector is needed for model, G is fixed, T fixed exogenously, and the
condition for product market equilibrium is from equation (2),
I ( r )+G=S +T (7)
To analyze the factors, these three views from increase in G, T, and I:

As a result which is these figure from the class slide on Week 6, the increase in G ,
the. decrease in T , and autonomously increase in I have the effect of shift to the right.
Secondly, it presents the factor that shift the LM curve. For the LM curve, there.
are two factors can bring shifts of it,
 The changes of money supply (M s )
 The changes of money demand (M d )
Additionally, changing of equation (6) is to identify the interception and the slop of the
LM schedule:
c0 1 c Y
LM :r = − ( M s0) + 1 ( 6)
c2 c2 c2
For the analysis of the factors, these below figures are two shifts’ perspectives from.
money supply and demand:

Therefore, the increase in M s will shift LM to the right, and the shift of M d which.
increases the amount of money demand will bring the left shift, and vice versa in
each situation.

In conclusion,
 The IS curve shifts to the right: the increase in G , the decrease in T , and the
autonomously increase in I
 The IS curve shifst to the left: the decrease in G , the increase in T , and the
autonomously decrease in I
 The LM curve shifts to the right: the increase in M s , and the decrease in M d
 The LM curve shifts to the left: the decrease in M s , and the increase in M d

Presentation by G1.6 and G2.6


Submission by group leaders in Spectrum.

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