Economics · Macroeconomics - IS-LM Framework
The Hicks-Hansen model or the IS-LM framework provides a comprehensive analysis of the simultaneous equilibrium in the goods market and the money market. Under conditions where the government pursues fiscal consolidation to reduce the debt-to-GDP ratio while the central bank maintains a stable inflation target, which of the following scenarios would result in a significant decrease in national income accompanied by a decrease in the equilibrium interest rate?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1A significant increase in corporate tax rates leading to reduced investment demand while the central bank maintains a constant and rigid money supply.
- 2An increase in the marginal propensity to save among the population combined with an increase in the demand for money for speculative purposes.
- 3A sharp reduction in the government budget deficit through spending cuts while the money supply remains perfectly inelastic to interest rate changes.✓
- 4A simultaneous increase in autonomous government expenditure and a proactive increase in the nominal money supply by the central bank.
Correct answer
A sharp reduction in the government budget deficit through spending cuts while the money supply remains perfectly inelastic to interest rate changes.
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