Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.
A) larger than the multiplier
B) the same as the multiplier
C) smaller than the multiplier
D) sometimes larger and sometimes smaller than the multiplier

Question

Quizplus · Accepted Answer

If the LM curve is not horizontal, it means that the interest rate changes when output (income) changes. In this case, the multiplier is smaller than the multiplier in the case of a horizontal LM curve. This is because an increase in government spending leads to a decrease in the supply of loanable funds, which increases the interest rate and reduces investment. As a result, the overall increase in aggregate demand is smaller, and the multiplier is smaller.

Using the IS-LM Analysis, If the LM Curve Is Not