If a spending shock reduces aggregate expenditure by $600 million and the multiplier is 2.5, then the IS curve will shift:
A)right by $240 million.
B)left by $1,500 million.
C)left by $600 million.
D)right by $600 million.

Question

Quizplus · Accepted Answer

According to the formula for the IS curve, Y = C(Y-T) + I(r) + G + NX, a decrease in aggregate expenditure of $600 million will lead to a decrease in output (Y) by a multiple of the multiplier (2.5), which is $1,500 million. This will shift the IS curve to the left by $1,500 million, indicating a decrease in output at every level of the interest rate.

If a Spending Shock Reduces Aggregate Expenditure by $600 Million