Show how the IS, LM and FE curves shift in response to the following events, and
ID: 1194137 • Letter: S
Question
Show how the IS, LM and FE curves shift in response to the following events, and give a brief explanation (one or two sentences) for the shift(s). Note we are not analyzing general (long-run) equilibrium here, just the initial shifts of the individual curves. Also note it is possible that none of the curves shift or multiple curves shift.
a. The government increases its spending (G), while holding taxes and transfers fixed.
b. Labor force participation decreases as baby-boomers retire.
c. The riskiness of holding securities (stocks and bonds) increases relative to the riskiness of holding money.
Explanation / Answer
Technology risk refers to the uncertainty surrounding the implementation of new technology in the operations of an FI. For example, if an FI spends millions on upgrading its computer systems but is not able to recapture its costs because its productivity has not increased commensurately or because the technology has already become obsolete, it has invested in a negative NPV investment in technology.