Economics · Macroeconomic Analysis
In the IS-LM framework (Hicks-Hansen model), if the government increases its expenditure on infrastructure projects while the central bank maintains a constant money supply, what specific phenomenon occurs within the model to adjust the initial impact on national income?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The IS curve shifts to the left, causing a decrease in interest rates and an increase in investment demand.
- 2The LM curve shifts to the right, leading to a decrease in interest rates and a higher level of national income.
- 3The IS curve shifts to the right, increasing interest rates and causing a crowding-out effect on private investment.✓
- 4The equilibrium moves along the IS curve due to a decrease in the marginal propensity to consume among the urban population.
Correct answer
The IS curve shifts to the right, increasing interest rates and causing a crowding-out effect on private investment.
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