Question

How would an IS curve shift if  (a) the federal government initiates a fiscal stimulus package? (b) the propensity to consume of households increases and businesses choose to build more capital via investment? (c) if the money supply increases?

Answer 1

In part (a) the IS curve will shift rightwards:

REASON:

Introduction of fiscal Stimulas Package by the fedral Government leads to either reduction in taxes or increase in government expenditure . These type of steps are generally taken by the government to either boost the whole economy or revive a particular industry. As a result of increase in government spending , income and interest rate respond negatively . Decrease in taxes or increase in government expenditure or both increase the level of income and shifts the aggregate expenditure curve upwards .

Thus , a decrease in taxes shifts the IS curve to the right . National Income increase in the commodity market . The demand for the money is increased in the money market and as a consequence the rate of interest increase . So at the end rate of interest and the level of income both increase .

Part (b)

In part (b) the IS curve will shift rightwards:

REASON: Marginal propensity to consume is the proportion of an increase in income that gets spent on consumption. The main factors that drive the marginal propensity to consume (MPC) are the availability of credit, taxation levels, and consumer confidence.

The propensity to consume of households increases and businesses choose to build more capital via investment can happen either by decrease in taxes or increase in government expenditure or both which further increase the  level of income and shifts the aggregate expenditure curve upwards .

Thus , a decrease in taxes shifts the IS curve to the right . National Income increase in the commodity market . The demand for the money is increased in the money market and as a consequence the rate of interest increase . So at the end rate of interest and the level of income both increase .

Part (c)

The IS curve in part (c) will shift rightward.

REASON: Money Supply is the total value of money available in an economy at a point of time. The standard measures ususally include currency in circulation and demand deposits.

:The increase in the money supply will lead to an increase in consumer spending. This increase will shift the AD curve to the right. Increased money supply causes reduction in interest rates and further spending and therefore an increase in AD.
Aggregate demand (AD) is the sum of consumer spending, government spending, investment, and net exports.

Thus , a decrease in taxes shifts the IS curve to the right . National Income increase in the commodity market . The demand for the money is increased in the money market and as a consequence the rate of interest increase . So at the end rate of interest and the level of income both increase .