Question

    In the standard IS-LM model, an increase in Government

    spending (G) without  changing taxes has
    A a positive effect on equilibrium consumption Correct Answer Incorrect Answer
    B a negative effect on equilibrium consumption Correct Answer Incorrect Answer
    C an ambiguous effect on equilibrium consumption Correct Answer Incorrect Answer
    D None of the above Correct Answer Incorrect Answer
    E Insufficient information Correct Answer Incorrect Answer

    Solution

    The increase in G shifts the IS upwards and to the right, which makes both output and the interest rate higher in equilibrium. However, the final effect on consumption is ambiguous since consumption depends positively on output and negatively on the interest rate.

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