#Effect of change in the government expenditure (ΔG):
If there is a change in government expenditure, it affects the economy’s equilibrium income and interest rate. For example, an increase in government expenditure increases AD and shifts the IS curve rightward, resulting in a new equilibrium with a higher level of income and interest rate.
Here, the economy is in equilibrium at Eo with ro interest rate and Yo output. Assume that government expenditure shifts the IS curve rightward from ISo to IS1. Now, the economy attains a new equilibrium E1 with higer interest rate r1 and a higher output Y1. This shows that government expenditure increases both the interest rate and output, and if the government reduces expenditure, it reduces both the interest rate and output.
Note: The effect of a change in investment has the same result as government expenditure. i.e., if ΔI increased, both an increase in interest rate and output. And if ΔI is decreased, it reduces both the interest rate and output.
#Effect of change in Tax (ΔT):
The changes in tax affect the equilibrium output and interest rate of the economy. If tax is increased, it reduces the aggregate demand, and both output and interest rate decline. Similarly, if the tax rate is decreased, it increases both the interest rate and output.
#Effect of change in Money Supply (ΔMs):
Any change in the money supply affects both the interest rate and the output of the economy. For example, if the money supply is increased, it reduces the interest rate and increases output, as shown in the figure below.
Initially, the economy is in equilibrium at Eo with an ro interest rate and OYo output. Now, assume that the central bank increases the money supply, which shifts the LM curve rightward from LMo to LM1. Then the economy attains a new equilibrium at E1 with a lower interest rate r1 and a higher output OY1.
This shows that increases in money supply has positive effect on output by lowering the interest rate.
राष्ट्र बैंकले Expansionary Monetary Policy ले Money Supply बढायो भने LM Curver भने Rightward तिर Shift हुन्छ र
- Interest rate decreases
- Output Increases
राष्ट्र बैंकले Contractionary Monetary Policy ले Money Supply घटायो भने LM Curver भने Leftward तिर Shift हुन्छ र
- Interest rate increases
- Output decreases
#Effect of change in Money demand (ΔMd):
Initially, the economy is in equilibrium at Eo with an ro interest rate and OYo output. Now, assume that the money demand is increased, which shifts the LM curve leftward from LMo to LM1. Then the economy attains a new equilibrium at E1 with a higher interest rate r1 and a lower output OY1.