In the IS-LM model,an increase in government spending in the goods market has an impact on the money market because
A)it increases the money supply.
B)it increases income,which increases money demand.
C)it decreases income,which decreases money demand.
D)it increases interest rates,which decreases money demand.
E)none of the above.

Question

Quizplus · Accepted Answer

An increase in government spending in the goods market increases the aggregate demand, which in turn increases income in the short run. This increase in income raises the demand for money, as people need more money to finance the increased level of transactions. Hence, the increase in government spending in the goods market has an impact on the money market by increasing money demand.

In the IS-LM Model,an Increase in Government Spending in the Goods