Question

In the classical IS-LM framework with a vertical LM curve, the government increases expenditure financed by bond issuance. Which of the following outcomes correctly describes the complete effect?

Q: Answer-In the classical IS-LM framework with a vertical LM curve, the government increases expenditure fina...

Classical LM is vertical fixed at full-employment output perfectly interest-inelastic money demand. Any rightward IS shift only raises the interest rate until private investment falls by exactly G 100 crowding out. Output remains unchanged. This is the classical neutrality of fiscal policy. C describes the Keynesian case upward-sloping LM with partial crowding out. D is wrong bond issuance does NOT expand money supply unless the central bank monetises the debt.

A IS shifts right; output rises by the full Keynesian multiplier; interest rate unchanged

B IS shifts right; output unchanged; interest rate rises sufficiently to crowd out private investment by exactly the amount of the fiscal expansion

C IS shifts right; both output and interest rate rise partially, with incomplete crowding out

D LM shifts right as bond issuance increases money supply; output rises; interest rate falls

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In the classical IS-LM framework with a vertical LM curve, the government increases expenditure financed by bond issuance. Which of the following outcomes correctly describes the complete effect?

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