In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:
A) prices.
B) investment.
C) the money supply.
D) taxes.

Question

Quizplus · Accepted Answer

In the IS-LM model, an increase in government spending shifts the IS curve to the right, leading to an increase in both output and the interest rate. This increase in interest rate leads to a decrease in investment, as it becomes more expensive for firms to borrow money. This is known as crowding out, as the increase in government spending crowds out private investment.

In the IS-LM Model Under the Usual Conditions in a Closed