With a positively sloped LM curve, the increase in GDP resulting from an increase in government spending
A) is larger than the usual multiplier effect because the resulting lower interest rates promote a secondary expansion in investment activity.
B) is smaller than the usual multiplier effect because the government has to reduce the money supply to pay for its new spending.
C) is larger than the usual multiplier effect because the corresponding increase in the money supply provides a second stimulative effect.
D) is smaller than the usual multiplier effect because the resulting higher interest rates cause a secondary contraction in investment activity.
E) none of the above.

Question

Quizplus · Accepted Answer

With a positively sloped LM curve, an increase in government spending typically leads to higher interest rates as the demand for money increases. This increase in interest rates can dampen investment spending, thus reducing the overall impact of the government spending multiplier.

With a Positively Sloped LM Curve, the Increase in GDP