Suppose there is an increase in government spending. to stabilize output, the federal reserve would decrease the money supply.
Today, the Federal Reserve uses its instruments to control the money supply and stabilize the economy. When the economy collapses, the Fed increases the money supply to boost growth. Conversely, when inflation threatens, the Fed reduces supply to reduce risk.
if this was our old equilibrium real interest rate and this was our equilibrium income, then stabilizing output and increasing government spending would raise the new equilibrium GDP and the new equilibrium interest rate would be higher just because of his shift towards the IS curve. I understand.
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