Question

We can expect the IS-curve to become flatter as

-the supply of money decreases

-the marginal propensity to consume decreases

-money demand becomes more interest sensitive

-investment becomes less sensitive to interest rate changes

-none of the above

Answer 1

ans) none of the above

reason: We should understand what is IS curve, it represents goods market. So, both money demand and money supply are irrelevant regarding to slope of the IS curve. For other options, we need to see the IS equation . The IS curve equation is simliar as Keynesian cross equation : Y=C(Y-T)+I(r)+G+NX(Y). The IS curve represents relation between interest rate and Income through investment function.So, slope of this equation will be a keynesian income multiplier or tax multiplier. If investment spending is sensitive to interest rate then slope will be larger so curve will be relatively flatter, since here in options investment is relatively less responsive to interest, so slope will be less, curve will be steeper. We also know that keynesian multiplier i.e, k= 1/1-mpc. So if mpc reduces; 1-mpc will increase this will reduce the value of K. Since multiplier is less, for a change in interest rate regardless responsiveness of Investment spending, change in income will still be less. Such that curve will be steeper not flatter.

Given is the IS curve diagram and how it is derived.