Refer to the information provided in Figure 12.5 below to answer the questions that follow.
Figure 12.5
-Refer to Figure 12.5.Which of the following combinations would definitely increase the equilibrium interest rate?
A)government spending increases and the price level increases
B)government spending increases and the price level decreases
C)government spending decreases and the price level increases
D)government spending decreases and the price level decreases

Question

Refer to the information provided in Figure 12.5 below to answer the questions that follow.
  Figure 12.5
-Refer to Figure 12.5.Which of the following combinations would definitely increase the equilibrium interest rate?
A)government spending increases and the price level increases 
B)government spending increases and the price level decreases 
C)government spending decreases and the price level increases 
D)government spending decreases and the price level decreases

Quizplus · Accepted Answer

According to the IS-LM model, an increase in government spending results in a shift of the IS curve to the right, which increases the equilibrium interest rate. In addition, an increase in the price level also results in a shift of the IS curve to the right as well as a shift of the LM curve to the left, which further increases the equilibrium interest rate. Therefore, an increase in government spending and an increase in the price level together would definitely increase the equilibrium interest rate.

Refer to the Information Provided in Figure 12