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MACROECONOMIC
DISTURBANCE
ASSOCIATED MOVEMENT
OF IS OR LM
Consider the six possible parametric
changes listed below. Match each of the
six changes in this column (marked by
four solid bullets and two hollow boxes)
with the consequent shift in the second
column.
CORRECTIVE
POLICY ACTION
Now identify the appropriate policy for
rectifying the problem. In some
instances, you may choose as many
as two policy options. Choosing two is
to be interpreted as using one or the
other of the two policies.
A waxing of the “animal spirits” ●
● an increase in government spending.
● shifts LM rightward. Shift
it backPOLICY
with ●
A KEYNESIAN VIEW OF MACROMALADY
AND
PRESCRIPTION
A waning of the “animal spirits” ●
● an increase in taxes.
Suppose that IS and LM intersect at full-employment income without inflation.
An increase in liquidity preferences ●
● shifts LM leftward.
Shift it back with ●
● a decrease in government spending.
Macroeconomic disturbances of various sorts can take the economy away
A decreased
in liquidity
preferencebliss
●
● a decrease in taxes.
from this
Keynesian
point.
● shifts IS rightward. Shift it back with ●
sorts of disturbances
can we expect?
An increased inWhat
saving propensities
❍
● shifts IS leftward. Shift it back with ●
curve (IS❍ or
A decreased inWhich
saving propensities
LM) will be directly affected?
● an increase in the money supply.
● a decrease in the money supply.
And what policy (or policies) can restore the economy to its bliss point?
(Click to test your skills at diagnosing and fixing the macromaladies.)