Suppose fiscal policy makers implement a policy to increase the size of a budget deficit. Based on the IS- LM model, we know with certainty that the following will occur as a result of this fiscal policy action:

Question

Quizplus · Accepted Answer

According to the IS-LM model, an increase in government spending would shift the IS curve to the right, leading to an increase in output. Therefore, the correct answer is B, output increases. The other options are not necessarily true, as the effect of fiscal policy on the price level and investment spending depends on various factors such as the initial position of the economy in the IS-LM model, the nature of the fiscal policy action, and the central bank's response.

Suppose Fiscal Policy Makers Implement a Policy to Increase the Size