In the IS-LM model, changes in government purchases lead to larger changes in GDP if
A) the IS curve is flatter due to a larger value of the marginal propensity to consume.
B) money demand becomes less sensitive to the interest rate.
C) they are offset by increases in taxes.
D) the LM curve becomes steeper.
E) none of the above.

Question

Quizplus · Accepted Answer

A flatter IS curve, due to a larger marginal propensity to consume, implies that a given change in interest rates leads to a larger change in GDP. This means that fiscal policy (changes in government purchases) has a stronger effect on GDP.

In the IS-LM Model, Changes in Government Purchases Lead to Larger