Question

Consider the IS-LM model presented in class. Suppose that the two curves have their standard slopes....

Consider the IS-LM model presented in class. Suppose that the two curves have their standard slopes. An increase in government spending will:

a. cause consumption to rise and investment to fall

b. cause consumption and investment to rise

c. cause consumption to fall and investment to fall

d. cause consumption to fall and investment to rise

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Answer #1

Answer = correct option is C

Reason = An increase in government expenditure, will increase aggregate expenditure curve which will result in rise in GDP and as a result consumption will increase. Rise In GDP will increase saving leading to lower interest rate and when interest rates falls , investment rises. Therefore increase in government spending will cause investment and consumption to rise.

since both investment and consumption will rise that's why other options are incorrect.

PLEASE GIVE YOUR VALUABLE REVIEWS ABOUT THE ANSWER IN THE COMMENT BOX AND YOU CAN ALSO GIVE THUMBS UP IF YOU LIKE THE ANSWER. THANK YOU

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