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what is the effect on IS or LM curve when there is increase in household savings?
Answer:
Short Answer:
Usually increases in savings shift the IS curve left and the LM curve down.
Reasoning Behind the Short Answer:
.......See: http://pages.stern.nyu.edu/~nroubini/NOTES/CHAP9.HTM
.......See: http://www.nd.edu/~tcosiman/ch-9.html
A higher saving rate (the ratio of S to Y) is also a lower consumption rate, since saving and consumption sum to after-tax income. An increase in the saving rate is a leftward shift in the IS curve. In the short-term, if individuals decide to consume less, this hurts firms, who are trying to sell, and leads them to lay people off. But, in the long term, a high savings rate usualy means more investment, growth in capital, & increases in output & wages.
The LM curve summarizes equilibrium in the market for money. The position of the LM curve depends upon the real money supply. An increase in the real money supply for a given level of GDP, usually increases total savings, which implies lower interest rates, shifting the LM curve downward.
If you want to know more about what IS & LM Curves represent:
.......See: http://en.wikipedia.org/wiki/IS/LM_model
IS: Investment/Saving equilibrium used to represent equilibrium in the product market, where total spending (Consumer spending + planned private Investment + Government purchases + net exports) equals an economy's total output and income. To keep the link with the historical meaning, the IS curve can represent the equilibrium where total private investment equals total saving, where the latter equals consumer saving plus government saving (the budget surplus) plus foreign saving (the trade surplus).
LM: Liquidity preference/Money supply equilibrium represents the equilibrium of the demand to hold money as an asset and the supply of money by banks and the Central Bank.
So, in IS/LM equilibrium, both product markets and money markets are in equilibrium.
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