Question

Intermediate Macroeconomics

1. A decrease in the marginal propensity to consume.

-Explain how it will affect the IS (shift, move along and directions). You should trace the effects to the relevant markets and use graphs.

Answer 1

Decrease in Marginal propensity to consume suggests that there is rise in propensity to save. it will reduce consumption level in economy. Fall in consumption level will cause further fall in IS curve or it will shift to left side.

There will be fall in interest rate and equilibrium income level.

Following is diagram:

• Fall in consumption shifts the IS curve from IS1 to IS2. Now new equilibrium is established at lower level where LM and IS curve intersects each other.
• Now new equilibrium has been established at lower level of interest rate and output.