In the IS-MP model, as public spending increases, money supply:
A)remains constant.
B)falls.
C)rises.
D)fluctuates.

Question

Quizplus · Accepted Answer

In the IS-MP model, as public spending increases, aggregate demand shifts to the right (to maintain equilibrium), causing output to increase. As output increases, the demand for money also increases, leading to a higher interest rate. To prevent the interest rate from rising, the central bank increases the money supply. Therefore, as public spending increases, money supply also increases.

In the IS-MP Model, as Public Spending Increases, Money Supply