Question

Question 8 (1 point) A rise in government spending shifts the IS curve because it_ national saving the interest rate for any given level of for any given level of income, and this income. 1) reduces; reduction lowers 2) reduces; reduction raises 3) increases; increase raises 4) increases; increase lowers

Answer 1

Answer 8

The correct answer is (2) reduces; reduction raises.

National Saving(NS) = Private saving + Public saving

where, Private saving Y - C - T and Public saving T - G

=> National Saving(NS) = Private saving + Public saving = Y - C - T + (T - G)

=> National Saving(NS) = Y - C - G ---------------------------(1)

where Y = Income, C = Consumption, T = Taxes, G = Government spending.

We can see from (1) that as Government spending(G) increases National Saving or Total Saving will decrease for any level of income.

This decrease in interest rate will shift Saving curve to the left while downward sloping investment curve will remain same and this leftward shifted saving curve will intersect investment curve for lower level of interest rate and hence this increase in government spending will result in increase in interest rate.

Hence, the correct answer is (2) reduces; reduction raises.