Can someone help me with the macroeconomics problem?

Question

A. Suppose there is an decrease in consumer optimism about the future (often called an decrease in consumer confidence). What will be the effect on consumption for any level of output and taxes? Show how the change in consumption behavior will affect the IS-LM diagram. What is the effect on output and the interest rate?

B. Suppose the Federal Reserve wanted to eliminate the effects on output you described in part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram, show how this policy, when combined with the decrease in consumer confidence, maintains constant output. How is investment ultimately affected by the combination of the decrease in confidence and the Federal Reserve policy? How is consumption affected?

Thank You

Answer 1

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A]

Reduction in consumption will shift IS curve left/up thus leading to the increase in interest rates and reducing equilibrium output

(left graph): http://home.comcast.net/~markthoma/Graphics/ISLM.g...

B]

FED may pursue expansionary monetary policy which will shift LM curve right/down (right graph). http://home.comcast.net/~markthoma/Graphics/ISLM.g...

It will reduce interest rate even more and will increase equilibrium output back.

http://www.mediafrontier.com/MBA/MICRO/is_lm.gif

Since interest rate is lower - investment increases.

Partially consumption may increase too (for instance because of expectations of GDP growth or higher consumption-borrowing).

Answer 2

EXPLAIN IN WORDS HOW & WHY THE MULTIPLIER αG AND THE INTEREST RATE SENSITIVITY OF AGGREGATE DEMAND AFFECT THE SLOPE OF THE IS CURVE ?