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This is a question which was asked in the entrance to Jawaharlal Nehru University's (New Delhi) entrance for their post-grad program specializing in International Economics in 2014.

Which of the following is true regarding the relation between IS and AD curves?

a) The commodity market must be in equilibrium along the IS curve but it may not be in equilibrium along the AD curve.

b) An increase in government spending will shift the IS curve but not the AD curve.

c) The steeper the IS curve, the steeper the AD curve.

d) A horizontal shift of the AD curve is typically greater than a horizontal shift in the IS curve due to crowding out.

I'm pretty sure the answer is A but I cannot find enough matter to convince my friends who are convinced it's D. Please help!

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Definition: The Aggregate Demand curve shows the combinations of the price level and level of output at which the goods market and assets (money) markets are simultaneously in equilibrium. This definition proves option a) incorrect. The correct option is d)

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  • $\begingroup$ Please vote up my question so I can vote up your answer? Thanks! $\endgroup$ – Jay May 14 '15 at 18:08

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