Determine the effects of each of the following shocks on income, the interest rate, consumption, and investment using the IS–LM model. In each case, explain what the Central Bank should do to keep income at its initial level.

Determine the effects of each of the following shocks on income, the interest rate, consumption, and investment using the IS–LM model. In each case, explain what the Central Bank should do to keep income at its initial level.

a. After the invention of a new efficient drug, many pharmaceutical firms decide to conduct research in this area and make additional investment into equipment.

b. A wave of credit-card fraud increases the frequency with which people make transactions in cash.

c. Households decide to increase the percentage of their income devoted to saving.


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