Which of the following statements concerning IS - MP analysis is true?
A) For a given change in taxes, the IS curve will shift less than for an equal change in government spending.
B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve.
C) A fall in the money supply shifts the LM curve to the right.
D) Expansionary fiscal policy will cause the interest rate to fall.

Question

Quizplus · Accepted Answer

The IS curve represents the relationship between the interest rate and the level of income that brings the goods market into equilibrium. A change in taxes affects disposable income and thus consumption less than an equal change in government spending because of the marginal propensity to consume. This means that for a given change in taxes, the shift in the IS curve is less than for an equal change in government spending, making statement A correct.

Which of the Following Statements Concerning IS - MP Analysis