In an IS-LM model, a decrease in the level of government purchases will result in

Question

Quizplus · Accepted Answer

In an IS-LM model, a decrease in the level of government purchases shifts the IS curve to the left, decreasing output and increasing the interest rate. This leads to a decrease in the level of consumption (due to lower income) and an increase in the level of investment (due to lower interest rates). Meanwhile, the LM curve shifts to the right, increasing real money balances. Therefore, both option A and B are correct.

In an IS-LM Model, a Decrease in the Level of Government