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) None of these answers are correct.

Question

Quizplus · Accepted Answer

When the multiplier 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, leading to greater fluctuations in output.

When the Multiplier Is Included in the IS Curve