Question

Based on our understanding of the IS-LM model that takes into account dynamics, we know that an increase in government spending will cause

A) a gradual increase in i and gradual increase in Y.
B) an immediate increase in Y and immediate drop in i.
C) an immediate increase in i and no initial change in Y.
D) a gradual increase in i and an immediate increase in Y.

Answer 1

In the IS-LM model that takes into account dynamics, an increase in government spending will cause a gradual increase in i and gradual increase in Y.

Step-by-step explanation:

In the IS-LM model that takes into account dynamics, an increase in government spending will cause a gradual increase in i and gradual increase in Y. This is because an increase in government spending will shift the Aggregate Demand (AD) curve to the right, leading to an increase in both the interest rate (i) and the level of output (Y) in the long run.