s positively on income. The interest rate might be a factor if people tended to economize on the amount of money held for the precautionary motive as interest rates rose. Speculative Demand - The money also held by those speculating on future changes in the relationship with the interest rate and the level of bond prices. If interest rates were expected to move in such a way as to cause capital losses on bonds, money would be held by those individuals. The speculative demand for money was negatively related to the interest rate.2. A) Decrease in government spending:Y decrease because Y = C + I + G (If G goes up so must Y.) The decrease in government spending shifts the IS schedule out to the left to a position IS1. The equilibrium level of income decreases. The equilibrium level of the interest rate also decreases. Lower interest rate serves to increase investment (I), thereby leading to increase in y. Money supply goes up, output goes up, and interest rates go down.b) Autonomous increase in investment spending:I increases because Y = C + I + G (If I goes up so must Y.) The autonomous increase in investment spending shifts the IS schedule to the right from ISo to IS1. Income increases from Y0 to Y1. The interest rate increases from Ro to R1. Income increases because investment demand at the initial interest rate from Io to I’1. As income increases, consumption spending increases. The interest rate increase is also a result from the income increase. The increase in income causes money demand to go up and interest rates to increase. C) Increase in money stock.The increase in money stock shifts the LM schedule to the right, LM to LM1. As a result, the interest rate falls from Ro to R1 and income rises from Yo to Y1. The increase in money stock creates an excess supply of money, which causes the interest rate to fall. As the interest rate falls, investment demand is increased, and this increase causes income to ris...
