In the long-run ISLM model and with everything else held constant,the long-run effect of an autonomous fall in consumption expenditure 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, changes in consumption expenditure have no impact on potential output. Therefore, the real output will not change in the long-run after an autonomous fall in consumption expenditure. However, the fall in consumption expenditure will shift the IS curve to the left and reduce demand for goods and services, leading to a decrease in the interest rate in the long-run.

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