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Exhibit: Policy Interaction Based on the Graph, Starting from Equilibrium

Question 5

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Exhibit: Policy Interaction Exhibit: Policy Interaction Based on the graph, starting from equilibrium at interest rate r<sub>3</sub>, income Y<sub>2</sub>, IS<sub>1</sub>, and LM<sub>1</sub>, if there is an increase in government spending that shifts the IS curve to IS<sub>2</sub>, then in order to keep the interest rate constant, the Bank of Canada should _____ the money supply, shifting to _____. A) increase; LM<sub>2</sub> B) decrease; LM<sub>2</sub> C) increase; LM<sub>3</sub> D) decrease; LM<sub>3</sub> Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Bank of Canada should _____ the money supply, shifting to _____.


A) increase; LM2
B) decrease; LM2
C) increase; LM3
D) decrease; LM3

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