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Unformatted text preview: increase in government spending. This increase in government spending leads to a rightward shift of the IS curve by the amount Δ G. However, output Δ Y increases by some amount less than Δ G because of the upward sloping LM curve. In essence, this increase in government spending leads to an increase in interest rate and output. Now let’s look at the consumption curve. The consumption function is of the form: C = C + c (Y – T), where c = MPC. Since output Δ Y increases less than Δ T, then disposable income ( Δ Y- Δ T) decreases, which leads to a decrease in consumption. Finally, since interest rate increases, this will cause investment (I) to decrease. I recommend that you look at Figure 11-1 and 11-2 for the graphical representation of the above....
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This note was uploaded on 11/17/2009 for the course ECO 121212 taught by Professor Smith during the Spring '09 term at Culver-Stockton.
- Spring '09