If government purchases decrease, the IS curve will
A)shift to the left and intersect the FE line at a higher real interest rate.
B)shift to the right and intersect the FE line at a lower real interest rate.
C)shift to the left and intersect the FE line at a lower real interest rate.
D)shift to the right and intersect the FE line at a higher real interest rate.

Question

Quizplus · Accepted Answer

A decrease in government purchases reduces aggregate demand, causing the IS curve to shift to the left. This typically results in a lower equilibrium real interest rate as the economy moves to a new equilibrium with lower output.

If Government Purchases Decrease, the IS Curve Will