When a spending shock occurs, the IS curve shifts by the:
A)size of the multiplier.
B)change in spending times the multiplier.
C)change in spending.
D)change in spending divided by the multiplier.

Question

Quizplus · Accepted Answer

The IS curve represents the relationship between output and interest rates for a given level of prices. When there is a spending shock, it causes a change in aggregate demand which affects the level of output. The size of the impact on output depends on the multiplier effect. The multiplier effect is the impact of a change in spending on output. Therefore, the IS curve shifts by the change in spending times the multiplier.

When a Spending Shock Occurs, the IS Curve Shifts by The