Suppose that China's economy in Graph 9.8 is located right between the two chopsticks in the shaded area. Using Graph 9.4, show what natural economic forces will tend to build up and move the economy in one direction or the other?

Question

Quizplus · Accepted Answer

The Answer is For any given interest rate, Y is too small relative to the LM and too large relative to IS or we are above the LM and above the IS this is equivalent to Quadrant 2. At that point there is an excess supply of money plus inventory accumulatiom Interest rates will fall and assuming the IS curve has a stronger pull than the LM, output will fall too. We will move closer to the IS curve's base. Keep in mind, however, that our chopstick economy has no equilibrium in a Keynesian sense.

Suppose That China's Economy in Graph 9