In the IS-LM model, if investor sentiments deteriorate, then, in order to prevent a recession, public spending should:
A)increase.
B)decline.
C)remain constant.
D)fluctuate.

Question

Quizplus · Accepted Answer

In the IS-LM model, a deterioration in investor sentiments would lead to a decrease in investment spending and a shift in the LM curve to the left. This would cause a decrease in income and a potential recession. To prevent this, public spending should increase, shifting the IS curve to the right and increasing income, thus cushioning the impact of the decrease in investment spending.

In the IS-LM Model, If Investor Sentiments Deteriorate, Then, in Order