Question

Part 4

a)  What economic conditions would result in a very steep IS curve? Briefly explain.

b)  If an economy was in deep recession what type of demand-side policy would be most effective when the IS curve is very steep?

c)  Explain why low levels of economic confidence may hinder the effectiveness of monetary policy?

At the end of your answer to Part 4 state the combined word count for sub-parts a, b and c. Your answer to Part 4 should not exceed 150 words.

(1 mark for sub-part a, 0.5 marks for sub-part b, 2 marks for sub-part c plus 0.25 marks for satisfying the word count requirements - Part 4 worth 3.75 marks)

Answer 1

a)IS curve represent the equality between the savings and investment in the goods market. According to the IS curve when there is an decrease in the interest rate it will stimulate the aggregate demand which will result in the increase of output.The steepness of IS curve is determined by the interest elasticity of the investment demand.When the investment demand is less elastic to the interest rate the IS curve will become more steeper and it will induce less changes in the investment due to changes in the interest rate
b)when the economy is deep recession it is very important for the economy to increase its aggregate demand.The investments should increase in the economy.With the increase in the investments only the country can recover from the recession.The steeper IS curve shows that the investment demand is inelastic or less elastic to changes in the interest rate.Hence the government should stimulate the demand

(c): low level of confidence may hinder the effectiveness of monetary policy.The low confidence in monetary policy may lead to wage and price spiral and this may lead to hampered growth and reduced employment in the economy.