An increase in wealth would cause the IS curve to
A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.

Question

Quizplus · Accepted Answer

An increase in wealth would increase consumption expenditure, which would shift the IS curve up and to the right. This is because higher wealth would increase households' capacity to spend, leading to an increase in GDP for any given interest rate. The effect would hold even if there are no borrowing constraints.

An Increase in Wealth Would Cause the IS Curve to