In an IS-LM Model with Fixed Exchange Rates and Perfect

question 22

Multiple Choice

In an IS-LM model with fixed exchange rates and perfect capital mobility, a cut in government spending shifts the IS-curve to the left

• A)without affecting the LM-curve
• B)but then back to the right again because of the resulting increase in net exports
• C)but then the central bank is forced to restrict the money supply, so the LM-curve also shifts to the left
• D)but then the central bank is forced to expand money supply, so the LM-curve shifts to the right
• E)but then a capital inflow from abroad results, forcing the government to reverse its policy

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