5

first choose the correct answer. Then, write down your own explanation for why the chosen answer is correct for this question and why other answers are incorrect.

Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy action.

A) Investment spending will increase.

B) There will be no change in investment spending.

C) Investment spending will decrease.

D) none of the above can be known with certainty