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.
Question
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.
Solution
A. IS curve shifts to the right, LM curve is unchanged.
Here's why:
Step 1: Understand the IS-LM model. The IS-LM model is a macroeconomic model that shows the relationship between interest rates and real output in the goods and services market and the money market. The IS curve represents all equilibriums in the goods market, and the LM curve represents all equilibriums in the money market.
Step 2: Understand the impact of government expenditure. An increase in government expenditure directly increases aggregate demand, which increases income and output. This shifts the IS curve to the right.
Step 3: Understand the impact of taxes. An increase in taxes decreases disposable income, which reduces consumption and thus aggregate demand. However, in this case,
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.
Consider the IS relation for an economy with both government and external sectors. Which of the following statements is correct?Group of answer choicesA rise in the marginal tax rate combined with a fall in the responsiveness of investment to the rate of interest might reduce, or it might increase or it might leave unchanged the slope of IS curve.An increase in the marginal propensity to import should lead to a parallel shift to the left in the IS curve.A rise in the marginal propensity to consume together with a rise in exogenous taxation should shift the IS curve leftwards as well as making it flatter.An increase in the income-expenditure multiplier combined with a reduction in the responsiveness of investment to the rate of interest would definitely make the IS curve flatter.
Suppose policy makers decide to reduce the money supply. This monetary policy action will cause which of the following to occur?Select one:A.Both the IS and LM curves shift.B.Output will change causing a change in investment and a shift of the IS curve.C.The LM curve shifts and the economy moves along the IS curve.D.The IS curve shifts and the economy moves along the LM curve.E.Neither the IS nor the LM curve shifts.
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.
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