However they do not cause shifts of the IS curve Changes in the interest rate

However they do not cause shifts of the is curve

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Changes in the interest rate do cause changes in investment, demand, and output. However, they do notcause shifts of the IS curve. Changes in the interest rate cause movements along the IS curve.4)The fiscal expansion will cause an increase in output. However, changes in output only causemovements along the LM curve. The effects of changes in output on the interest rate are embedded inthe shape of the LM curve.5)A Fed purchase of bonds will cause an increase in central bank money (H) and an increase in the moneysupply. This will cause an excess supply of money and the interest rate must fall to restore moneymarket equilibrium. The LM curve will shift down as a result of this to reflect the now lower interestrate. The IS curve does not shift as a result of this. We would simply observe a movement along the IScurve.6)A reduction in taxes will cause an increase in disposable income and an increase in consumption. Therise in consumption will cause an increase in demand and the equilibrium level of output in the goodsmarket will be higher. This is reflected in a rightward shift in the IS curve. Goods market events such asthis will not cause a shift in the LM curve (only a movement along it).7)An increase in consumer confidence will cause an increase in consumption and, therefore, an increase indemand and a rightward shift in the IS curve. As output increases, money demand will increase causingthe interest rate to rise. The effects on investment are ambiguous. The higher output will causeinvestment to rise, while the higher interest rate will cause investment to fall. i Y i A Y A LM A IS A IS B Y B i B