In the IS-LM model, if government spending decreases and money supply increases, the nominal interest rate:
A)increases.
B)declines.
C)remains constant.
D)fluctuate.

Question

Quizplus · Accepted Answer

In the IS-LM model, when government spending decreases, the IS curve shifts to the left, leading to a decrease in output and a decrease in the interest rate. When the money supply increases, the LM curve shifts to the right, leading to a decrease in the interest rate. Therefore, both factors suggest a decrease in the interest rate. Hence, the nominal interest rate declines.

In the IS-LM Model, If Government Spending Decreases and Money