Question

How do the following changes influence the IS curve? Explain the direction of shift for each....

How do the following changes influence the IS curve? Explain the direction of shift for each.

1. Consumers increase the fraction of income they consume

2. Firms feel good about the future prospect of economy so that they raise the investment

3. Foreign demand for Korean products go up exogenously.

4. Government introduces a large spending program that stimulate the economy.

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Answer #1

1 )Consumers Increase the fraction of income they consume. It means that the MPC increases. Increase in MPC doesn't shift. It will affect the slope of IS Curve. IS Curve would be flatter, the greater the MPC.

2) If the firms Increase investment, IS Curve would Shift to the right.

3) Foreign demand for Korean products Increases exogenously.(assuming we are talking about Korea) It will Increase the Net expots of Korea. It will lead to a rightward Shift in IS Curve.

4) Governnment introduces a large spending that stimulates the Economy. It will increase Governnment spending. This will Shift the IS Curve to the right.

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