An increase in government purchases 1. IS curve shifts right △G LM y 1-MPC causing output income to rise 2. This raises money demand causing the interest rate to rise 3... which reduces investment so the final increase in y 3 is smaller than △G 1-MPC CHAPTER 11 Aggregate Demand Il slide 3CHAPTER 11 Aggregate Demand II slide 3 causing output & income to rise. IS1 An increase in government purchases 1. IS curve shifts right Y r LM r1 Y1 1 by 1 MPC G − IS2 Y2 r2 1. 2. This raises money demand, causing the interest rate to rise… 2. 3. …which reduces investment, so the final increase in Y 1 is smaller than 1 MPC G − 3