When thinking about the adjustment process, remember that underlying the aggregate demand curve are the IS and LM curves.

a.Assume that the economy is initially in equilibrium, but that then the IS curve is shifted out. Using two IS - LM diagrams, show the adjustment process (i) for the case when the economy returns directly to equilibrium and (ii) for the overshooting case. Briefly explain your diagrams.

b.Repeat part a for the case where the LM curve is initially shifted out. Briefly explain your diagrams.

Answer rating: 100% (QA)

Adjustment Process with ISLM Shifts a IS Curve Shift i Direct Equilibrium Initial Equilibrium Point A IS and LM curves intersect representing initial equilibrium interest rate i and output level Y IS ... View the full answer