Question

Which of the following will cause the IS curve to have a shallower slope?

A. An increase in the marginal propensity to consume

B. An increase in the tax rate

C. All of these 3 options will

D. A decrease in interest sensitivity

Answer 1

Lets understand the nature of IS curve:

To plot the IS curve, we have interest rates on the y axis and output on the x axis. Therefore any changes in these leads to movement along the curve while as IS curve is derived from the points of intersection of AD curve with the 45⁰ curve.Any change in the autonomous inputs to Ad curve shift the IS curve parallely which is the case in options A and B so these are incorrect.

IS curve is inversely related to interest rates implying that at a higher level of the interest rate investment spending decreases and vice versa. The steepness/flatness of the curve is related to the sensitivity of  investment to interest rate changes.Higher the sensitivity, flatter the curve and lower the sensitivity, steeper the curve. This implies D is correct.