Study Questions on ISLM
1. What are the points on the IS curve? Why does the IS curve slope downwards? How can it make sense to represent GDP as a function of interest rates when GDP depends on so much else?
2. Krugman describes the other curve (as is traditional) as the LM curve, while David Romer describes it as the MP curve. Are they talk about the same thing? What do the initials stand for? What are the reasons why these curves slope upwards? Is the reason why the LM curve slopes upward the same as the reason why the MP curve slopes upwards?
3. Both the IS and the LM (MP) curves relate GDP to the interest rate, i. Is i the nominal interest rate or the real interest rate (that is, the interest rate adjusted for the rate of inflation)?
4. What happens if the IS and LM curves intersect at a value of GDP that is greater than full-employment GDP?
5. What happens if the IS and LM curves intersection at a zero interest rate?