Assume the economy is initially in equilibrium with real GDP equal to potential GDP.Other things equal,if the economy enters a recession and there are no automatic stabilizers,the IS curve would shift to the ________,and the shift would be equal to ________.
A) right; decline in investment spending
B) left; decline in investment spending
C) right; decline in investment spending times the multiplier
D) left; decline in investment spending times the multiplier

Question

Quizplus · Accepted Answer

If the economy enters a recession and there are no automatic stabilizers, aggregate demand will decrease causing the IS curve to shift to the left. The magnitude of the shift would depend on the size of the decline in investment spending and the multiplier, which would amplify the initial decline. Therefore, the correct choice is D - left; decline in investment spending times the multiplier.

Assume the Economy Is Initially in Equilibrium with Real GDP