Assume That the Economy Is in Equilibrium at an Interest

question 32

Multiple Choice

Assume that the economy is in equilibrium at an interest rate and level of national income where the IS curve cuts the LM curve. A large cut in government spending would be expected to:

• A) increase interest rates and the level of national income.
• B) reduce interest rates but increase the level of national income.
• C) reduce interest rates and the level of national income.
• D) shift the IS curve to the right.
• E) leave the economy in an unchanged position because the marginal propensity to consume is constant.

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Definitions:

Tax

Compulsory contributions to state revenue, levied by the government on workers' income, business profits, or added to the cost of some goods, services, and transactions.

Supply Curve

A graph representing the relationship between the price of a good or service and the quantity of it that producers are willing to supply.

Equilibrium Price

The market price at which the quantity of a good demanded equals the quantity supplied, leading to market stability.

Inverse Demand Function

A mathematical representation showing the relationship between the quantity demanded of a good and its price, typically derived by solving the demand function for price.