Question

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 shifts downward

26) The IS curve will shift to the left when which of the following occurs?

A) a reduction in the money supply

B) a reduction in government spending

C) an increase in the interest rate

D) all of the above

E) none of the above

27) Which of the following occurs as the economy moves rightward along a given IS curve?

A) A reduction in the interest rate causes investment spending to decrease.

B) A reduction in the interest rate causes money demand to increase.

C) A reduction in the interest rate causes a reduction in the money supply.

D) An increase in government spending causes a reduction in demand for goods.

E) A reduction in taxes causes a reduction in demand for goods.

Answer 1

24) (a) When the government expenditure increases or government adopts fiscal expansionary policy, the IS curve shifts to rightward.

25) (a) Since, the government has used balanced budget policy, the IS curve will not shift. In this case, the balanced budget multiplier will be equal to 1.

26) (b) Whenever, government uses contractionary fiscal policy (reduction in government spending or rise in taxes) the IS curve shifts to left.

27) (d) As the economy moves rightward along a given IS curve, interest rate rises and with a rise in interest rate, the demand for investment falls because there is an inverse relationship between interest rate and investment demand. So, the overall demand for goods falls.