Consider an initial IS-LM equilibrium with normally-sloped curves.An increase in government spending shifts the ________ by a horizontal distance equal to the change in government spending ________.
A)IS curve to the right,divided by the Chapter 3 multiplier
B)IS curve to the right,times the Chapter 3 multiplier
C)IS curve to the left,times the interest rate at the initial equilibrium
D)LM curve to the right,divided by the Chapter 3 multiplier
E)LM curve to the right,divided by the interest rate at the initial equilibrium

Question

Quizplus · Accepted Answer

An increase in government spending shifts the IS curve to the right. The amount of the shift is equal to the amount of the increase in government spending multiplied by the Chapter 3 multiplier. This is because an increase in government spending increases aggregate demand, which increases output and income, leading to a further increase in aggregate demand through the multiplier process. The LM curve does not shift in response to a change in government spending, as it is determined by the demand for money and the interest rate.

Consider an Initial IS-LM Equilibrium with Normally-Sloped Curves