Draw a graph showing the IS–LM model and
identify the initial equilibrium.
a. For each of the following changes, show the
effect on the output gap and the real interest
rate.
i. The government increases taxes.
ii. The Fed decreases the money supply.
iii. Consumers experience an increase
in wealth due to increases in stock
prices.
b. How would your answers to part (a) be
different if you were using the IS–MP
model?