If a spending shock reduces aggregate expenditure by $40 billion and the multiplier is 2, then the IS curve will shift:
A)right by $80 billion.
B)right by $40 billion.
C)left by $80 billion.
D)left by $40 billion.

Question

Quizplus · Accepted Answer

The IS curve will shift left by $80 billion because the spending shock reduces aggregate expenditure, and with a multiplier of 2, the total reduction in GDP will be 2 times the initial shock, hence $40 billion times 2 equals $80 billion.

If a Spending Shock Reduces Aggregate Expenditure by $40 Billion