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.
