Aggregate Demand II
End of Chapter Problem
Use the IS-LM model to predict the short-run effects of each of the following shocks on income, the interest rate, consumption,
and investment. In each case, explain what the Fed should do to keep income at its initial level.
For each of these shocks, (1) shift the appropriate curve in the IS-LM graph to reflect how the economy will respond to the
shock; (2) indicate the impact of the shock on consumption, income, the interest rate, and investment by placing each in the
appropriate category of \"increase\" or \"decrease\"; and (3) identify the Fed's proper policy response to maintain income at its
inital level.
a. After the invention of a new high speed computer chip, many firms decide to upgrade their computer systems.