For each of the following events, 1) state whether there is movement along the IS curve...

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For each of the following events, 1) state whether there is movement along the IS curve...

For each of the following events, 1) state whether there is movement along the IS curve or a shift, and 2) the direction of the shift or movement along. If the IS curve isn’t affected, be sure to state that too.

1) The real interest rate decreases

2) Firms begin to expect lower future profits

3) Government spending increases

4) Real GDP (output) increases

business economics

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Answer 1

Answer #1

1) there will be an downward movement along the curve. this is because there is a negative relationship between the interest rate on the real GDP along the IS curve. Therefore when interest rate decreases, real GDP increases.

2) this is unlikely to shift the IS curve to the left. When there is lower future profitability expected, investment declines and this decreases aggregate expenditure. As a result real GDP declines. Goods market has a lower equilibrium and therefore IS curve shifts left

3) this will increase aggregate expenditure and therefore, IS curve shifts to the right

4) there will be a downward movement along the curve

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Answer 2

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