Question

Explain why within the IS-LM curve model an increase in government spending causes the interest rate...

Explain why within the IS-LM curve model an increase in government spending causes the interest rate to rise. What factors determine the magnitude of the increase in the interest rate for a given increase in government spending?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

In the IS- LM model, an increase in the government spending increases the aggregate expenditure as it is a part of it. The increase in aggregate expenditure shifts the IS curve towards the right, causing an increase in the equilibrium output and interest rate.

The extent of this increase is determined by the slope of the LM curve. If the LM curve is too flat, the rise in the rate of interest due to the shift in the IS curve will be less compared to a situation where the LM curve is steeper.

These are shown in the figure below:

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
An increase in government spending leads to lower investment in the IS-LM model. True or false...
An increase in government spending leads to lower investment in the IS-LM model. True or false and why? (I assume an upward sloping LM curve)
24) An increase in government spending will likely have which of the following effects? A) a...
24) An increase in government spending will likely have which of the following effects? A) a rightward shift in the IS curve B) a leftward shift in the IS curve C) an upward shift in the LM curve D) a downward shift in the LM curve 25) If government spending and taxes increase by the same amount, A) the IS curve does not shift B) the IS curve shift leftward C) the IS curve shifts rightward D) the LM curve...
1.In the IS–LM model in a closed economy, an increase in government spending increases the interest...
1.In the IS–LM model in a closed economy, an increase in government spending increases the interest rate and crowds out: Select one: a. the money supply. b. investment. c. taxes. d. prices. 2.In the case of cost-push inflation, other things being equal: Select one: a. the unemployment rate rises but the inflation rate falls. b. both the inflation rate and the unemployment rate fall. c. both the inflation rate and the unemployment rate rise at the same time. d. the...
20) Which of the following best defines the LM curve? A) the combinations of i and...
20) Which of the following best defines the LM curve? A) the combinations of i and Y that maintain equilibrium in the goods market B) illustrates the effects of changes in i on investment C) illustrates the effects of changes in i on desired money holdings by individuals D) the combinations of i and Y that maintain equilibrium in financial markets 21) Based on our understanding of the IS-LM model that takes into account dynamics, we know that a reduction...
22. The crowding out effect is zero if A) the LM-curve is horizontal B) the LM-curve...
22. The crowding out effect is zero if A) the LM-curve is horizontal B) the LM-curve is vertical C) the Fed conducts open market sales following fiscal expansion D) income is stimulated via a tax cut rather than an increase in government spending E) none of the above 23. Crowding out occurs when A) an increase in defense spending causes a decrease in consumption B) expansionary monetary policy fails to stimulate economic growth C) expansionary fiscal policy causes interest rates...
The total demand for funds curve slopes downward because a rise in the interest rate causes...
The total demand for funds curve slopes downward because a rise in the interest rate causes _____. A. government borrowing to decrease B. business borrowing to decrease C. both government borrowing and business borrowing to decrease D. household saving to increase E. consumption spending to decrease
In the classical model, what is the effect of an increase in government spending that is...
In the classical model, what is the effect of an increase in government spending that is not financed by an increase in taxes (an increase in the deficit)? How do prices, real GDP, consumption, saving, investment spending, and real interest rates change as a result of the increase in government spending? Explain and show graphically. (Hint: Use the market for loanable funds model.)
Question 1: A bond-financed increase in government spending in the classical model would cause both real...
Question 1: A bond-financed increase in government spending in the classical model would cause both real output and the interest rate to rise. Is this true or false? Explain your answer.
1) Equilibrium output will rise and the equilibrium interest rate will fall if : A) government...
1) Equilibrium output will rise and the equilibrium interest rate will fall if : A) government spending increases B) net exports increase. C) there is an autonomous increase in money demand D) the Fed increases the money supply 2) In the IS/LM model A) the money supply is always fixed B) consumptions expenditures are fixed C) the price level is fixed D) the level of real GDP is fixed 3)Changes in monetary policy shift the LM curve, while changes in...
Illustrate and explain what happens to the LM curve when prices increase? What is happening in...
Illustrate and explain what happens to the LM curve when prices increase? What is happening in the money market that causes the LM curve to shift?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT