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Equilibrium output and the equilibrium interest rate

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Reference no: EM131695459

Use the following information to answer the next 3 questions. 

Suppose we are in a short run equilibrium where IS=LM at some point A. A new presidential candidate has recently been elected and one of their campaign promises was to drastically decrease wasteful government spending and to never decrease taxes.

1. Draw the effect of a decrease in government spending in the IS-LM model. Upload a picture of your graph.

2. What happens to equilibrium output and the equilibrium interest rate?

3. Is it possible to decrease G but to maintain the same equilibrium output in the economy before the spending cuts? If so, how? (Drawing a picture might be very helpful). Upload a picture of your graph with an explanation.

Reference no: EM131695459

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