My Question: Please read the question and answer below plus see attached. I’m wondering if we know the effect on
investment or if it’s unknown?
Question 1. Based on your understanding of the IS-LM model, graphically illustrate and explain what effect a reduction in consumer confidence will have on output, the interest rate, and investment.
My Answer: Decreases in consumer confidence would shift the ZZ curve down to ZZ’ as shown below representing a decrease in demand and output.. The IS curve would shift left representing lower output and lower interest rate (as shown below). The effect on investment is unknown because investment is dependent on output and interest rates.