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) a change in the real interest rate has a smaller impact on short-run fluctuations than with the standard IS curve
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 change in the marginal product of capital has a smaller effect on short-run fluctuations in output than with the standard IS curve

Question

Quizplus · Accepted Answer

Including the multiplier effect in the IS curve means that a demand shock has a larger impact on short-run fluctuations in output than with the standard IS curve. This is because the multiplier effect amplifies the initial impact of the demand shock on output.

When the Multiplier Is Included in the IS Curve