Interest Rate E Y DIAGRAM A LM LM" E" IS Output Interest rate B Y+Y₁ Income, output DIAGRAM B LM₁₂ LM IS Interest rate Income, output DIAGRAM C LM 15 Interest rate 15 Income, output DIAGRAM D IS₂ LM 1 IS
2.1 “The IS–LM model shows how national income is determined in the short run. The model can
therefore be used to examine how various economic disturbances affect income.”
In terms of the above statement examine the impact of each of the exogenous events given
below on the national income/output level and employment level. For each of the events a
specific diagram below applies. Use the most relevant diagram to substantiate
your answer, for example, state,
2.1a. Firms in an economy become pessimistic about the future of the economy and this
pessimism causes them to build fewer new factories.
2.1b. The election of a popular president increases consumer confidence in the economy. This
induces consumers to save less for the future and consume more today.
2.1c. Restrictions on credit card availability is reduced and the amount of money people choose to
hold decreases.
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