The effects of financial deregulation on the IS and LM curves ________ the volatility of interest rates as the curves shift,such as the change in the amount that the interest rate must ________ when the Fed conducts open market purchases.

Question

Quizplus · Accepted Answer

Financial deregulation loosens restrictions and allows for more competition and innovation, which can increase the supply of credit and decrease borrowing costs. This shifts the LM curve to the right and downward, leading to a lower equilibrium interest rate. At the same time, the removal of regulations can also increase the risk and uncertainty in financial markets, which can shift the IS curve to the left and upward, raising the equilibrium interest rate. Therefore, the effects of financial deregulation on the IS and LM curves increase the volatility of interest rates as the curves shift, such as the change in the amount that the interest rate must fall when the Fed conducts open market purchases.

The Effects of Financial Deregulation on the IS and LM