Under a floating exchange rate system, what will happen about the IS* curve if the government implements the expansionary fiscal policy?A.IS* curve will shift right.B.IS* curve will shift left.C.IS* remain unchanged.D.IS* curve will shift right and then shift left.
Question
Under a floating exchange rate system, what will happen about the IS* curve if the government implements the expansionary fiscal policy?A.IS* curve will shift right.B.IS* curve will shift left.C.IS* remain unchanged.D.IS* curve will shift right and then shift left.
Solution
The answer is A. IS* curve will shift right.
Here's why:
The IS* curve represents the relationship between the interest rate and the output level in an open economy under a floating exchange rate system.
When the government implements an expansionary fiscal policy, it increases government spending or decreases taxes. This leads to an increase in aggregate demand, which in turn increases the output level.
As a result, for each interest rate, the output level is higher. This is represented by a rightward shift of the IS* curve.
So, under a floating exchange rate system, if the government implements an expansionary fiscal policy, the IS* curve will shift to the right.
Similar Questions
Which of the following actions will shift the IS curve to the left?A.Increasing government spending on public transport.B.Implementing expansionary fiscal policy.C.Raising tax offsets.D.Raising tax rates.
A decrease in taxes or an increase in government spending will:shift the IS curve to the right.shift the IS curve to the left.cause the IS curve to fluctuate.not affect the IS curve.
The effect of expansionary fiscal policy is shown as aMultiple Choicerightward shift in the economy's aggregate demand curve.leftward shift in the economy's aggregate supply curve.leftward shift in the economy's aggregate demand curve.movement along an existing aggregate demand curve.
In a closed economy, the government increases the same amount of government expenditure and taxes, how will the IS curve and LM curve shift?A.IS curve shifts to the right, LM curve is unchanged.B.IS curve shifts to the left, LM curve is unchanged.C.IS curve is unchanged, LM curve shifts to the right.D.IS curve is unchanged, LM curve shifts to the left.
A fiscal expansion will tend to cause which of the following to occur? Assume the LM curve is horizontal. Select one:A.an increase in the interest rate and an increase in investmentB.a reduction in the interest rate and a downward shift in the LM curveC.no change in the interest rate and an ambiguous effect on investmentD.no change in output if the Fed simultaneously pursues expansionary monetary policy
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