Question

1.

a) 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?

b) In which direction would the

 schedule shift, and by how many units? ( 1+3=4 marks)

Answer 1

1.The position of the IS curve is determined by the degree of government spending and taxation, as well as the tax system. The LM curve is unaffected by fiscal policy. Borrowing is assumed to be used to fund increased government spending or a tax cut. The LM curve does not change since the money supply does not vary.

2.Hence the schedule will shift to the left.