Answer to Question #209644 in Macroeconomics for Jai

Question

If the level of government spending were to decrease by 100 units in the IS – LM schedule

 model, how would this affect the position of the IS schedule?(1+3=4)

Answer 1

Based on decrease in spending, the savings will automatically increase getting a chance to invest therefore there will be increase in investment. Similarly, the GDP, total output will increase making the IS curve to slope towards right side and downwards. In this case, I-S schedule slopes upwards since the interest rate may also be higher which further incorporates more income and higher output level.