In the IS-LM framework, a simultaneous increase in

Solution

Analyze the shifts: o Increase in Government Spending (Expansionary Fiscal Policy): This shifts the IS curve to the right. This movement, by itself, would increase both equilibrium output (Y) and interest rates (i), as higher demand for goods increases transactions demand for money, pushing up i. o Increase in Money Supply (Expansionary Monetary Policy): This shifts the LM curve to the right. This movement, by itself, would increase output (Y) but decrease interest rates (i), as higher money supply lowers the cost of borrowing. o Combined Effect: Both policies work to increase output (Y), so the effect on Y is unambiguously positive. However, their effects on interest rates (i) oppose each other (fiscal pushes i up, monetary pushes i down). The net effect on interest rates depends on the relative magnitude of the shifts. If the monetary expansion is very large, i might fall. If the fiscal expansion is very large, i might rise. Therefore, the effect on interest rates is ambiguous.