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© 2014 Pearson Canada Inc.#
Which of the following does not shift the IS curve?
A) An increase in autonomous consumption.
B) An increase in government spending.
C) A decline in government spending.
D) A fall in the interest rate.
Answer: D
Diff: 2 Type: MC Page Ref: 554
Skill: Recall
Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output
What are the factors that can shift the IS curve to the right?
Answer: The factors that can shift the IS curve to the right are: an increase in autonomous
consumer demand, an increase in investment spending unrelated to the interest rate, an increase
in government spending, a decrease in taxes, and an increase in net exports.
Diff: 2 Type: SA Page Ref: 554
Skill: Recall
Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output
What is the role of the government, according to Keynes, in stimulating the economy, raising
aggregate output and reducing unemployment when the economy is in a recession?
Answer: Keynes realized that government spending and taxes could also affect the position of
the aggregate demand function and hence be manipulated to restore the economy to full
employment and Yad = C + I + G + NX. Thus, government spending adds directly to aggregate
demand, while taxes do not affect aggregate demand directly. This is why when there are taxes
disposable income does not equal aggregate output. It equals output Y minus taxes T: YD = Y -
T. According to Keynes's analysis an equal increase in government spending and taxes in the
economy that is in recession can restore full employment output as government spending leads to
a multiplied change in aggregate output through the expenditure multiplier: × G. The
equal increase in taxes, only reduces consumer expenditure by mpc × T. Thus the final result is
an increase in aggregate output.
Diff: 2 Type: SA Page Ref: 552
Skill: Recall
Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output