Analyzing macroeconomic events with the IS curve (I): Consider the followingchanges in the macroeconomy. Show how to think about them using the IScurve, and explain how and why GDP is afected in the short run.
Analyzing
changes in the macroeconomy. Show how to think about them using the IS
curve, and explain how and why GDP is afected in the short run.
The IS curve shows the equilibrium in the goods market. The IS curve downward sloping and it represents that if the interest rate falls then the equilibrium level of national will increase.
Impact of contractionary fiscal policy on IS curve
Fiscal policy initiated by the government by increasing or decreasing government spending or by doing changes in the tax rate in order to influence the aggregate demand.
In order to decrease demand and to tighten the inflation rate, the government should decrease its expenditure and increases the tax rate thereby it will lead to a lower budget deficit.
When government spending decreases then the IS curve will shift to the left and this leftward shift in IS curve will cause a decrease in the interest rate and fall in output.
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