When the multiplier is included in the IS curve,
A)a demand shock has a larger impact on short-run fluctuations than with the standard IS curve.
B)it has no impact on potential output.
C)a demand shock has a smaller impact on short-run fluctuations than with the standard IS curve.
D)a change in taxes has no impact on short-run output.
E)a and b are correct.

Question

Quizplus · Accepted Answer

When the multiplier effect is included in the IS curve, a demand shock has a larger impact on short-run fluctuations than with the standard IS curve. This is because the multiplier effect amplifies the initial impact of the shock. However, the inclusion of the multiplier does not have any impact on potential output (i.e., the long-run level of output the economy can produce), so option B is incorrect. Option C is also incorrect because the larger impact of the demand shock on short-run fluctuations implies that it has a larger, not smaller, impact than with the standard IS curve. Option D is incorrect because a change in taxes can have an impact on short-run output, even when the multiplier is included in the IS curve. Therefore, the correct answer is option A.

When the Multiplier Is Included in the IS Curve