Taking the IS-LM and AS-AD relationship, show the shifts in the curves and explain the changes variables such as output, exchange rate, employment and price level following a decrease in interest rate.
A decrease in interest rate results in an increase in demand for real money balances, which accelerates spending, as well making investment desirable that further increases the output. This can be demonstrated through both IS and LM curve the shifting to the right. As output increases it shifts the aggregate demand curve to right, increasing the price level. Lastly, in the short run, as output increases unemployment decreases.
Related Economics University answers
All answers ▸To what extent would a change in fiscal policy increase real GDP for an economy?
A poor economy is at its steady state equilibrium. It is given a foreign aid package, to help it catch up with the developed world. Is this a good policy decision and why or why not?
What is the difference between consumer surplus and producer surplus, and what significance do these two concepts have on the free market?
microeconomics