Question

Explain & use the appropriate IS-LM graphs to predict the SHORT RUN effects on Y, r,I, & C of the following shocks in a closed economy.
a. An increase in the liquidity of stocks & Bonds

Answer 1

I havent done this in 2 years but i can try to help a bit

do you know what does it mean when there is an increase in the liquidity of stocks & Bonds

Answer 2

yes. I think it means decreasing in money demand?

Answer 3

I know what happens to Y (up) r(down) , but how do to find out I and C? @jayz657

Answer 4

well when there is a change in money demand, that affects the LM curve which causes the LM curve to decrease as well.

so people are buying more goods (consuming more) causing people to invest less as people are selling their bonds more often so you answer your question C increases, and I decreases (not 100% sure about I)

Answer 5

also note if people are selling their bonds more often, that means people will have more money to spend (C increase)

Answer 6

but if the liquidity increases, can I say people have more money to invest? thus I increases?

Answer 7

if people are selling their bonds that means people are not investing (bonds and stocks also means investing) since they want money they are expected to use that money to consume goods

Answer 8

OH! now I get it. Thank you so much!

Answer 9

your welcome :)