In the IS-LM model, nominal interest rates equal real interest rates because we
ID: 1141129 • Letter: I
Question
In the IS-LM model, nominal interest rates equal real interest rates because we assume that in the short run the exchange rate is fixed the price level is fixed. the output level is fixed. the tax rate is fixed. QUESTION 16 Which of the following will shift the IS curve to the left? A decrease in the country's interest rates An increase in the country's tax rate A decrease in the country's money supply A decrease in the country's savings rate QUESTION 17 Which of the following will shift the LM curve to the right? An increase in the country's money supply A decrease in the country's interest rates A decrease in the country's taxes An increase in the country's GDPExplanation / Answer
1) (b) Real interest rates=nominal interest rate-inflation. So real interest rates equal nominal interest rate only when inflation is zero or when prices are fixed. Thus in IS-LM model real interest rates equal nominal interest rate because we assume that in the short run prices are fixed.
2) (b) An increse in the country's tax rate will lower the aggregte demand by reducing consumption and will shift the IS curve to the left.
3) (a) An increase in country's money supply will put downward pressure on the interest rates and will cause the LM curve to shift to the right.