Question

According to Sir John Maynard Keynes IS curve is impacted by stable and unstable components. Identify the stable and unstable components of IS curve and explain the reasons for instability?

Answer 1

Expansionary fiscal policy moves the is a curve to the right. rising both income and interest rates. contractionary fiscal policy moves the is a curve to the left, lowering both income and interest rates. we can use the ISLM model to look at the impact of fiscal policy: government decisions on taxation and spending.the factors that led to the instability of is curve is changing in autonomous consumer expenditure, change in planned investment spending unrelated to the interest rate, changes in government spending, changes in taxes, changes in net exports unrelated to the interest rate. ll these occur response to a change in fiscal policy-an an increase in government spending raises aggregate demand directly: decrease in taxes makes more income available for spending.the increase in aggregate demand causes aggregate output to rise. a higher level of aggregate output increases the demand for money.if the fiscal policy is not changing then is curve will be stable