An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.

Question

Quizplus · Accepted Answer

An increase in government spending shifts the IS curve upward and to the right because it raises the demand for goods and services, leading to higher income and higher interest rates. This is because when the government spends more, there is more money flowing through the economy, increasing output and causing interest rates to rise as people borrow more to fund their increased consumption.

An Increase in Government Spending Generally Shifts the IS Curve