A flatter IS curve would necessarily result fromGroup of answer choicesa lower marginal tax rate and a higher interest elasticity of investmenta higher interest elasticity of investment and a flatter planned aggregate expenditure functiona higher marginal propensity to consume and a lower interest sensitivity of investmenta lower interest elasticity of investment and an unchanged planned aggregate expenditure function.
Question
A flatter IS curve would necessarily result fromGroup of answer choicesa lower marginal tax rate and a higher interest elasticity of investmenta higher interest elasticity of investment and a flatter planned aggregate expenditure functiona higher marginal propensity to consume and a lower interest sensitivity of investmenta lower interest elasticity of investment and an unchanged planned aggregate expenditure function.
Solution
The IS curve, which represents the relationship between the interest rate and the level of income in the goods and services market, becomes flatter when the economy's response to changes in the interest rate increases. This can happen in two scenarios:
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A lower marginal tax rate: A lower marginal tax rate increases disposable income, which can lead to higher consumption and investment. This increases the interest elasticity of investment, making the IS curve flatter.
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A higher interest elasticity of investment: When the interest elasticity of investment is high, a small change in the interest rate leads to a large change in investment. This makes the IS curve flatter because the level of income changes significantly for a given change in the interest rate.
Therefore, a flatter IS curve would necessarily result from a lower marginal tax rate and a higher interest elasticity of investment.
Similar Questions
If investment spending is very sensitive to the interest rate, then:Group of answer choicesthe IS curve should be relatively flatthe IS curve should be relatively steepthe LM curve should be relatively flatthe LM curve should be relatively steepneither the IS nor the LM curve will be affected
The figure below depicts the aggregate investment function of an economy. Based on this information, which of the following statement is correct? Select the two correct answersGroup of answer choicesCeteris paribus, an increase in the interest rate would lead to a fall in investment due to an inward shift of the investment line.A rise in corporate tax would make the investment line flatterA flatter line indicates the higher sensitivity of the level of aggregate investment to changes in interest rate.A forecast of a permanent demand increase shifts the investment line outwards
The effectiveness of monetary policy in an IS-LM system increases when Group of answer choicesThe IS curve is flatterThe IS curve is steeperThe multiplier is smallerThe LM starts off at a higher level
he marginal benefit curve is: Group of answer choicesAn individual’s demand curve for the product.An individual’s demand curve, that is derived varying income.Typically flat, indicating a constant benefit derived from consuming the good.b and c.None of the above.
Which of the following statements is correct ?Group of answer choicesThe IS relation refers to combinations of real income and the rate of interest consistent with equilibrium in the money market.Points on the IS curve shows how aggregate expenditure varies with the rate of interest when the goods market is not in equilibrium.The slope of the IS curve reflects the sensitivity of consumption and investment to changes in the rate of interest as well as the size of the multiplier.An increase in the marginal propensity to consume would result in a parallel rightward shift of the IS curve.
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