An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________,everything else held constant.
A)rise;LM;right
B)rise;IS;right
C)fall;LM;left
D)fall;IS;left

Question

Quizplus · Accepted Answer

An increase in autonomous consumer expenditure (e.g. due to an increase in consumer confidence or a tax cut) will shift the IS curve to the right as it increases demand for goods and services at any given interest rate. This in turn will raise the equilibrium level of aggregate output (i.e. real GDP), since more goods and services will be produced to meet the increased demand. The LM curve, on the other hand, is not directly affected by changes in autonomous expenditure. Therefore, the correct answer is B, as it correctly identifies the direction of the shift and the curve affected.

An Increase in Autonomous Consumer Expenditure Causes the Equilibrium Level