A flatter IS curve implies that the aggregate demand curve will be
A)steeper and the k1 multiplier becomes larger.
B)flatter and the k1 multiplier becomes smaller.
C)unaffected and the k1 multiplier becomes smaller.
D)vertical and the k1 multiplier becomes smaller.

Question

Quizplus · Accepted Answer

A flatter IS curve indicates that for any given interest rate, there is a smaller change in output or real GDP. This implies that the aggregate demand curve will also be flatter, as it is derived from the IS-LM model. With a flatter AD curve, the value of the k1 multiplier will be smaller, as there is less of a change in equilibrium output for a given change in autonomous expenditure. Therefore, choice B is the correct answer.

A Flatter IS Curve Implies That the Aggregate Demand Curve