Assume that the economy is in equilibrium at an interest rate and level of national income where the IS curve cuts the LM curve. A large cut in government spending would be expected to:
A) increase interest rates and the level of national income.
B) reduce interest rates but increase the level of national income.
C) reduce interest rates and the level of national income.
D) shift the IS curve to the right.
E) leave the economy in an unchanged position because the marginal propensity to consume is constant.

Question

Quizplus · Accepted Answer

A large cut in government spending would shift the IS curve to the left, leading to a decrease in both interest rates and national income as the new equilibrium point is reached where the new IS curve intersects the LM curve. This is because a decrease in government spending reduces aggregate demand, leading to a decrease in output and income.

Assume That the Economy Is in Equilibrium at an Interest