Explain in words how investment multiplier and the interest...

Explain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve. Explain in words how and why the income and interest sensitivities of the demand for real balances affect the slope of the LM curve. According to the IS–LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances? a. The central bank increases the money supply. b. The government increases government purchases. c. The government increases taxes.

Transcript

00:01 Okay, so first we're going to talk about investment multiplier and interest sensitivity of aggregate demand affecting is -carve slope.

00:12 So for investment multiplier, a larger investment multiplier implies that any increase in investment leads to a significantly larger increase in aggregate output.

00:24 Now, this makes the is curve flatter because it shows that even small increase in investment due to lower interest rate can generate large increases in income or output.

00:39 So, large investment multiplier implies a flat is curve.

00:45 Now, as for interest sensitivity of aggregate demand, high interest sensitivity means that a small decrease in interest rates leads to a significant increase in investment and consumption.

01:08 Now, this also flattens the is curve as it indicates a strong response of aggregate demand to changes in interest rates.

01:16 Rates.

01:18 So high interest sensitivity means also flat is curves.

01:32 Now next we're gonna talk about income and interest sensitivities of the demand for real balances affecting lm curve slope.

01:48 Okay, so now as for income sensitivity of demand for real balances, if the demand for real balances is highly sensitive to income, it means that as income increases, people want to hold more money.

02:05 Now, this requires higher interest rates to motivate holding money instead of investing, which steepens the lm curve.

02:16 So, demand for real balance is sensitive implies that the lm curve is steep.

02:52 Now, as for interest sensitivity of demand for real balances, high interest sensitivity implies that small changes in interest rates lead to significant shifts in the demand for money...

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