Goods and financial markets: the IS-LM model

4 important questions on Goods and financial markets: the IS-LM model

On which two factors does investment depend?

1. Level of sales, increase ins ales means investment in machinery to keep up
2. Interest rate, higher rates means decrease in investment

Fiscal contraction/consolidation

Policy that reduces the budget deficit, by increasing taxes while keeping the government spending unchanged

What are 3 results of fiscal contraction?

1. Higher taxes, lead to a lower output -> IS shifts to the left
2. NO effect  on LM
3. New equilibrium on LM, output and interest rate decreases
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Monetary contraction/tightening

Decrease in the money supply

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