Question

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 inflation rate rises but the unemployment rate falls.

Answer 1

1. In the IS–LM model in a closed economy, an increase in government spending shifts the IS curve to the right and leads to increase in the interest rate and crowds out the investment as people starts saving more due to higher interest. Option B is correct.

2. Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials therefore we experience both the inflation rate and the unemployment rate rise at the same time. Option C is correct.