All else being equal, an increase in government spending would shift the ______ line to the ______, causing interest rates to _______ and the trade balance to _______.
A) LM; right; fall; fall
B) IS; right; rise; rise
C) LM; left; rise; rise
D) IS; right; fall; fall

Question

Quizplus · Accepted Answer

An increase in government spending shifts the IS curve to the right, leading to higher interest rates due to increased demand for funds. This, in turn, appreciates the domestic currency, reducing exports and increasing imports, thus worsening the trade balance.

All Else Being Equal, an Increase in Government Spending Would