1. Dec 2019 Question 5
(a) Explain two (2) factors determining shifts in the IS curve.
Answer:
1. Changes in government spending
- Both income and interest rates respond positively to changes in government
spending; increases in taxes or reductions in government expenditure, or both,
reduce the level of income and hence push the aggregate expenditure curve
downwards.
2. Changes in autonomous consumer expenditure
- Autonomous consumer expenditure refers to the expenditures that a consumer
needs to make, regardless of their income level. This factor increase or decrease
the level of saving or investment that will change the equilibrium level of interest
rate for each level of income. For example an increase in wealth causes desired
savings to fall at every level of income. The equilibrium level of interest rate will
then be higher at each level of income, shifting the IS curve up at every level of
income.
2. Dec 2018 Question 5
(a) Define the IS curve.
Answer:
IS stands for "ideal savings equals ideal investment" in a closed economy (one with
no trade). In an open economy, this curve represents the income and interest rate
combinations that result in the desired net capital outflow (savings minus investment) that
equals the desired current account balance.
(a) Explain two (2) factors determining shifts in the IS curve.
Answer:
1. Changes in government spending
- Both income and interest rates respond positively to changes in government
spending; increases in taxes or reductions in government expenditure, or both,
reduce the level of income and hence push the aggregate expenditure curve
downwards.
2. Changes in autonomous consumer expenditure
- Autonomous consumer expenditure refers to the expenditures that a consumer
needs to make, regardless of their income level. This factor increase or decrease
the level of saving or investment that will change the equilibrium level of interest
rate for each level of income. For example an increase in wealth causes desired
savings to fall at every level of income. The equilibrium level of interest rate will
then be higher at each level of income, shifting the IS curve up at every level of
income.
2. Dec 2018 Question 5
(a) Define the IS curve.
Answer:
IS stands for "ideal savings equals ideal investment" in a closed economy (one with
no trade). In an open economy, this curve represents the income and interest rate
combinations that result in the desired net capital outflow (savings minus investment) that
equals the desired current account balance.
