A rise in government spending shifts the IS curve because it ______ national saving for any given level of income,and this ______ the interest rate for any given level of income.
A) reduces; reduction lowers
B) reduces; reduction raises
C) increases; increase raises
D) increases; increase lowers

Question

Quizplus · Accepted Answer

A rise in government spending reduces national saving because it typically increases the budget deficit. This reduction in national saving raises the interest rate for any given level of income, as the supply of loanable funds decreases.

A Rise in Government Spending Shifts the IS Curve Because