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Exhibit: Policy Interaction
-(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r₃, income Y₂, IS₁, and LM₁, if there is an increase in government spending that shifts the IS curve to IS₂ and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____.

Question

Use the following to answer questions :
Exhibit: Policy Interaction

-(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r₃, income Y₂, IS₁, and LM₁, if there is an increase in government spending that shifts the IS curve to IS₂ and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____.

Quizplus · Accepted Answer

An increase in government spending shifts the IS curve to the right, leading to a higher equilibrium income and interest rate. Since the Federal Reserve does not change the money supply, the interest rate will increase to r₂ and the income will increase to Y₃. Thus, the new equilibrium combination of interest and income will be r₂, Y₃.

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