Referring to the Economic Stimulus Act of 2008,the expansionary effect of the government stimulus was overwhelmed by the continuing deterioration in credit market conditions. Everything else held constant and using the ISLM model,the net effect would cause the ________ curve to ________ and output will ________.
A)IS;shift left;decrease
B)IS;shift right;increase
C)LM;shift right;increase
D)LM;shift left;decrease

Question

Quizplus · Accepted Answer

The statement indicates that the expansionary effect of the government stimulus was overwhelmed by the worsening credit market conditions. This would cause a decrease in investment and consumption demand, which would shift the IS curve leftward. Therefore, the correct option is A, where the IS curve will shift leftward, decreasing output, and causing a contraction in the economy. The LM curve is unlikely to shift rightward as it represents the monetary policy, which is not expected to have an expansionary effect in a worsening credit market condition.

Referring to the Economic Stimulus Act of 2008,the Expansionary Effect