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    Question

    In the context of the IS-LM model, a simultaneous

    increase in government spending and the money supply will most likely lead to:
    A A definite increase in the interest rate and an ambiguous change in output. Correct Answer Incorrect Answer
    B A definite increase in output and an ambiguous change in the interest rate. Correct Answer Incorrect Answer
    C A definite increase in both output and the interest rate. Correct Answer Incorrect Answer
    D A definite decrease in the interest rate and an ambiguous change in output. Correct Answer Incorrect Answer
    E No change in either output or the interest rate. Correct Answer Incorrect Answer

    Solution

    An increase in government spending shifts the IS curve to the right, raising both output and interest rates. An increase in the money supply shifts the LM curve to the right, raising output but lowering interest rates. The combined effect is a definite increase in output, but the impact on the interest rate depends on the relative strength (magnitude) of the two policies, making it ambiguous.

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