Figure 4-6
-In the figure above, suppose we are initially at point 2. A reduction in government spending causes income to change by ________ and the interest rate to change by ________ than would be the case in the Chapter 3 model.

Question

Figure 4-6 
-In the figure above, suppose we are initially at point 2. A reduction in government spending causes income to change by ________ and the interest rate to change by ________ than would be the case in the Chapter 3 model.

Quizplus · Accepted Answer

In the Chapter 4 model, a reduction in government spending will cause a leftward shift in the IS curve, resulting in a lower income level and a higher interest rate level compared to the Chapter 3 model. This is because in Chapter 4, the LM curve is flatter due to the possibility of a liquidity trap, meaning that changes in income have a smaller impact on the interest rate. Therefore, the change in income will be less, while the change in interest rate will be more pronounced.

Figure 4-6 -In the Figure Above, Suppose We Are Initially at Point