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    In the context of a closed economy IS-LM model;

    (a) Under what circumstances would the following have no effect of the level of output?
    i. An increase in government spending.
    ii. An open market purchase of bonds, from the public.

    (b) Under what circumstances would the following have no effect on the rate of interest?
    i. An increase in government spending.
    ii. An open market purchase of bonds, from the public.

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    Solution Preview

    (a) Under what circumstances would the following have no effect of the level of output?
    i. An increase in government spending.
    This is actually a question about the shape of LM curve.
    We know that the LM is flat at lower level of interest rate and output, and turns more and more steep when output level increases. When the output is close to the potential output level, it is like a vertical ...

    Solution Summary

    LM curve is evaluated.

    $2.49

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