Question

Use the IS–LM diagram to describe the short run and long-run effects of the following changes

on national income, the interest rate, the price level, consumption, investment and real money

balances

a. An increase in government purchases

Answer 1

a. An increase in government purchases will cause IS curve to increase and move rightwards, as a result national income will increase, the interest rate and the price level will increase, consumption and investment will increase, real money balance will increase.