Assume the Exchange Rate Is Fixed

question 63

Essay

Assume the exchange rate is fixed.Using the IS-LM model,graphically illustrate and explain what effect a reduction in consumer confidence will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

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Definitions:

Inelastic

Refers to a scenario where the supply or demand for a product or service shows little to no reaction to price fluctuations.

Supply Curve

A graphical representation of the relationship between the price of a good and the quantity of the good that suppliers are willing and able to sell, with price typically on the vertical axis and quantity on the horizontal axis.

Horizontal Axis

The “left-right” or “west-east” measurement line on a graph or grid.

Equilibrium Quantity

The quantity of goods or services supplied and demanded at the equilibrium price, where supply equals demand.