In the IS-LM model, if public spending, G, declines, then in the new equilibrium:
A)output declines.
B)output increases
C)the real interest rate rises.
D)all of the above.

Question

Quizplus · Accepted Answer

In the IS-LM model, a decrease in public spending leads to a decrease in aggregate demand, which shifts the IS curve to the left. The new equilibrium point is where the IS and LM curves intersect at a lower level of output and a higher real interest rate. Therefore, output declines and the real interest rate rises.

In the IS-LM Model, If Public Spending, G, Declines, Then