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Homework answers / question archive / Let's consider the recent announcement of the effectiveness of various COVID vaccines
Let's consider the recent announcement of the effectiveness of various COVID vaccines. Suppose this news increased optimism about the trajectory for the economy and boosted both consumption and investment spending.
Would this increased optimism be represented as a shift in the IS and/or LM curve(s)? In which direction? Briefly explain the channels through which this confidence shock works through the macroeconomy.
The IS curve shifts when they are autonomous changes on in consumption, interest rate, government spending or the export market. Focusing on the Keynesian cross, discovery of COVID-19 vaccine increases consumption, the IS Curve will shift to the right
On the other hand, the government will halt the fiscal stimulus package as the economy returns gradually to full employment. Money supply will decrease ceteris paribus, thus raising the interest rates at each output level hence shifting the LM to the left.
Step-by-step explanation
Discovery of the COVID-19 vaccine will boost both consumption and investment spending. The IS curve shifts when they are autonomous changes on in consumption, interest rate, government spending or the export market. Focusing on the Keynesian cross, discovery of COVID-19 vaccine increases consumption, the IS Curve will shift to the right. The discovery of the vaccine denotes that lockdowns will be lifted and business will thrive thus raising the aggregate demand which spurs consumption. The discovery of the vaccine will spur investment income and also increase the export and import business since travel restrictions will be lifted. The IS curve will shift to the right to reflect the new output and interest rate.
On the other hand, the government will halt the fiscal stimulus package as the economy returns gradually to full employment. Money supply will decrease ceteris paribus, thus raising the interest rates at each output level hence shifting the LM to the left.
