In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

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BlackTom AI · Accepted Answer

Question restatement: The prompt asks about the IS-LM consequences of a decrease in government purchases, specifically how planned expenditures, total income, money demand, and the equilibrium interest rate change.
Option a: 'a. decrease; decrease; decrease; decrease' — This aligns with the standard chain in the IS-LM framework. A fall in G shifts the IS curve left, reducing autonomous expenditure components and raising the scarcity of goods, which lowers planned expenditures and reduces equilibrium income. With lower income, money demand (transaction demand) falls as people transact less, so money demand decreases. Since money supply is fixed, a smaller money demand leads to a downward pressure on the interest rate to restore money market equilibrium. Overall, all four items decrease, so this option is consistent with the model.
Option b: 'increase; increase; increase; increase' — This would imply that a drop in government spending boosts all variables, which contradicts the directionality of a fiscal contraction. A leftward shift of IS reduces income and expenditures, not increases them. Therefore this option misstates the effects and is incorrect.
Option c: 'decrease; decrease; increase; increase' — Here, while planned expenditures and income correctly fall, money demand is said to rise and the interest rate would rise as well. In a contractionary scenario with lower Y, money demand should fall, not rise, because transactions demand declines. The LM side would not require a higher interest rate; it tends to fall due to reduced money demand. This option mixes an incorrect money-demand effect with an incorrect interest-rate response.
Option d: 'increase; increase; decrease; decrease' — This option suggests that a fall in G raises expenditures and income, which is illogical for a fiscal contraction. The IS curve would shift left, not right, so expenditures and income would not increase. Money demand would more likely fall (not decrease as stated) and the interest rate would not simultaneously trend downward in a way that matches the described sequence. This option does not fit the standard IS-LM outcome.
Summary: Among the choices, option a provides the coherent sequence: decreases in planned expenditures, total income, money demand, and the equilibrium interest rate, consistent with a decrease in government purchases in the IS-LM framework.

BU.220.610.51.FA25 M8 Final Comprehensive Exam - Multiple Choice Questions- Requires Respondus LockDown Browser

In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

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BU.220.610.51.FA25 M8 Final Comprehensive Exam - Multiple Choice Questions- Requires Respondus LockDown Browser

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

View Explanation

Log in for full answers

Similar Questions

If, in addition, 𝑅 𝑡 = 𝑟 ¯ , short run output [ Select ] .

The IS curve shifts when any of the following economic variables change except:

When the LM curve is drawn, the quantity that is held fixed is:

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will __, shifting the ____ curve to the right and returning output to the natural level.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

An increase in the money supply shifts the __ curve to the right, and the aggregate demand curve ____.

Other things equal, a given change in money supply has a larger effect on demand the:

The tax decrease makes the interest rate ______ and investment ______ in this model.

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In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the __ curve to the right and returning output to the natural level.

An increase in the money supply shifts the curve to the right, and the aggregate demand curve __.

The tax decrease makes the interest rate and investment in this model.