Suppose that both government spending and taxes decrease by $1,000.What happens to aggregate income and interest rates? By how much will they change? Explain using an IS-LM graph to illustrate.

Question

Quizplus · Accepted Answer

The Answer is The IS curve will decrease by $1,000 because the government spending multiplier is greater than the tax multiplier by a factor of one.An increase in the IS curve will increase both interest rates and income.

Suppose That Both Government Spending and Taxes Decrease by $1,000