In an IS-LM model, a decrease in autonomous saving will

Question

Quizplus · Accepted Answer

A decrease in autonomous saving will shift the IS curve to the right. This will increase both income and the interest rate as the new equilibrium point will be at a higher level of income and interest rate compared to the initial equilibrium point. Therefore, Option D is the correct answer. Option A is incorrect because a decrease in autonomous saving will increase consumption expenditure, which will increase income, but the increase in income may not be enough to offset the decrease in saving and hence the interest rate will also increase. Option B is incorrect because a decrease in autonomous saving will shift the IS curve to the right, not the LM curve. Option E is incorrect because a decrease in autonomous saving will increase income, but it may reduce the saving-investment gap, which will increase the interest rate. Option C is incorrect because a decrease in autonomous saving will shift the IS curve to the right.

In an IS-LM Model, a Decrease in Autonomous Saving Will