In the long-run ISLM model and with everything else held constant,the long-run effect of an autonomous increase in investment is to ________ real output and ________ the interest rate.
A)increase;increase
B)increase;not change
C)not change;increase
D)not change;decrease

Question

Quizplus · Accepted Answer

In the long-run ISLM model, an autonomous increase in investment initially increases demand, which could lead to higher output in the short run. However, in the long run, the economy returns to its natural level of output, as resources are fully utilized, and prices have adjusted. Therefore, real output does not change in the long run. The increase in investment demand leads to an increase in the demand for money, which, with a given money supply, results in a higher interest rate.

In the Long-Run ISLM Model and with Everything Else Held