According to the IS-LM framework, if the Government of

Solution

In the IS-LM framework, expansionary fiscal policy (like increased government spending on infrastructure) shifts the IS curve to the right. This shift indicates an initial increase in aggregate demand and total output. As output increases, the demand for money for transactions also rises. Since the money supply remains constant (a fixed LM curve), this increased demand for money puts upward pressure on the interest rate. A higher interest rate, in turn, can reduce private investment spending—a phenomenon known as Crowding Out.   Kindly note: ·        Both Interest Rate and Output will decrease describes contractionary fiscal policy or a leftward shift of the IS curve, which is the opposite of the scenario described. ·        Output will increase, but the Interest Rate will decrease would typically occur with expansionary monetary policy (shifting the LM curve right), not fiscal policy with a constant money supply. ·        Expansionary fiscal policy increases aggregate demand, which always shifts the IS curve to the right, not the left. ·        The LM curve shifts only when the money supply or price level changes. Since the money supply is constant, the LM curve remains stationary.