In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.
A) increase; supply
B) increase; demand
C) decrease; supply
D) decrease; demand

Question

Quizplus · Accepted Answer

An increase in government purchases in the goods market leads to an increase in income, which in turn increases the demand for money as people want to hold more money for transactions and precautionary purposes. This does not affect the supply of money, which is determined by the central bank.

In the IS-LM Model, the Impact of an Increase in Government