The intersection of the IS and LM curves determines the equilibrium:money supply and national income.inflation and interest rate.national income and interest rate.national income and inflation.
Question
The intersection of the IS and LM curves determines the equilibrium:money supply and national income.inflation and interest rate.national income and interest rate.national income and inflation.
Solution
The intersection of the IS (Investment-Saving) and LM (Liquidity preference-Money supply) curves determines the equilibrium of national income and interest rate.
Here's a step-by-step explanation:
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The IS curve represents the relationship between the interest rate and the level of income that ensures equilibrium in the goods market. It is downward sloping because as the interest rate decreases, investment increases, leading to a higher level of income.
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The LM curve represents the relationship between the interest rate and the level of income that ensures equilibrium in the money market. It is upward sloping because as income increases, the demand for money increases, leading to a higher interest rate.
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The point where the IS and LM curves intersect represents the equilibrium in both the goods and money markets. At this point, the interest rate and level of income are at levels that ensure both markets are in equilibrium.
So, the correct answer is: national income and interest rate.
Similar Questions
The LM curve represents a locus of points where the:government budget is balanced.goods and money markets are in equilibrium.money market is in equilibrium.goods market is in equilibrium.
In the IS-LM model, a decrease in government spending will lead to:A.A higher equilibrium level of income and lower interest ratesB.A lower equilibrium level of income and higher interest ratesC.A higher equilibrium level of income and higher interest ratesD.A lower equilibrium level of income and lower interest rates
Suppose that in a small open economy with perfect capital mobility and a fixed exchange rate, the domestic currency is valued higher than the official exchange rate. As the economy adjusts to achieve equilibrium, the LM* curve will shift rightward and:increase the equilibrium income.decrease the equilibrium income.leave the equilibrium income unaffected.destabilize the equilibrium income but make it fluctuate in unpredictable ways.
Equilibrium Level of National Income:
The equilibrium interest rate is determinedmultiple choiceto fluctuate over time.at the intersection of the total demand for money curve and the supply of money curve.at the intersection of the aggregate demand and aggregate supply curve.by the Fed
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