In the IS-MP framework, an expansionary fiscal policy resulting from government purchases, causes aggregate output to ________ and the interest rate to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question

Quizplus · Accepted Answer

An expansionary fiscal policy through government purchases shifts the IS curve to the right, leading to an increase in output. This results in a higher demand for money, causing an increase in the interest rate (the MP curve shifts up). Therefore, output increases (as seen from the IS curve shifting right) while the interest rate increases (as seen from the MP curve shifting up). Choice A is the correct answer.

In the IS-MP Framework, an Expansionary Fiscal Policy Resulting from Government