Question

In the IS–LM framework, if the government implements an expansionary fiscal policy and the central bank provides monetary accommodation to prevent a rise in the interest rate, what is the resulting effect on the IS and LM curves?

A The IS curve shifts to the right, and the LM curve remains unchanged, leading to a higher interest rate.

B The IS curve shifts to the right, and the LM curve shifts to the left to keep income constant.

C The IS curve shifts to the right, and the LM curve shifts to the right to maintain the initial interest rate.

D Both the IS and LM curves shift to the left, causing a decrease in equilibrium output.

Detailed Solution