Answer to Question #265310 in Macroeconomics for Natash

Question

Compare the effects of an autonomous increase in government spending in the IS-LM curve version of the Keynesian model with the effect of the same shift within the classical model

Answer 1

Solution:

Under the Keynesian model, an increase in autonomous government spending will lead to an increase in aggregate demand and consumption, resulting in an increase in aggregate output and a shift in the IS curve to the right.

Under the Classical model, an increase in autonomous government spending will have the same effect, but the IS curve intercept shift is smaller, the slope flat, and the crowding of investment is large.