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Explain how the IS curve shifts given each of the following changes: -- taxes decline --...

Explain how the IS curve shifts given each of the following changes:

-- taxes decline

-- autonomous investment rises

-- G rises

-- autonomous consumption falls

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Answer #1

(a) Lower taxes will boost investment demand, which will shift the IS curve rightward, increasing both interest rate and output.

(b) Increase in autonomous investment will increase investment demand, which will shift the IS curve rightward, increasing both interest rate and output.

(c) Increase in government spending will increase budget deficit, to finance which government will resort to deficit financing using borrowing. This will increase investment demand, which will shift the IS curve rightward, increasing both interest rate and output.

(d) Fall in autonomous consumption means that for every level of interest rate, national income is now lower, which will shift IS curve leftward, decreasing both interest rate and output.

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