In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls

Question

Quizplus · Accepted Answer

In the IS-LM model, an increase in government spending shifts the IS curve to the right, indicating an increase in aggregate demand. This leads to higher output (or income) and higher interest rates in the short-run equilibrium, as the economy moves along the LM curve.

In the IS-LM Model When Government Spending Rises, in Short-Run