Page 172 - DECO402_Macro Economics

Unit-18: IS - LM Analysis

investment expenditure and low interest Notes
rate increases the actual GDP because of
high investment expenditure. Being the
flatter or steeper of IS Curve depends
on this thing how sensitive investment
from the change in interest rate and
how much is the price of multiplier.
If investment is more sensitive from
an specified change of interest rate
then the IS Curve will be flatter. And
if investment is less sensitive from an
specified change of interest rate then
the IS Curve will be steeper. The price of
multiplier also determine to be steeper
or flatter of IS Curve. In the situation
of high multiplier price, because of an
specified change in investment, the
senstivity is larger (on a given interets
rate). Because of this AE Curve is flatter
which is responsible for being the IS
Curve flatter. In the situation of being
this multiplier price lesser, the AE Curve
is steeper because of which the IS Curve
is also respectively steeper.
In figure 18.5, the IS Curve is shown as
negative sloped. The IS Curve is flatter
for the high price of multiplier or interest
rate sensitive investment as IS . The IS
1
Curve is steeper for the low price of
multiplier or insensitive investment
as IS .
2
Two parameters impacting
slope of IS Curve Figure 18.4

(i) Sensitivity of I to r: The senstivity of I to r is as higher i.e., the responsiveness of investment
towards the change in interest rate the IS Curve will be as flatter and vice-versa.
(ii) Value of Multiplier: The value of Multiplier is as higher i.e., because of rise in investment
there is as rise in Aggregate Expenditure.

Shift in IS Curve

The shift in IS Curve happens because of the change in any analogous component of total expenditure.
In two sided economy, it can happen because of change in analogous consumption expenditure and
analogous investment expenditure. The rise in analogous investment expenditure shifts the IS Curve
towards left. It’s cause is easy. The rise in analogous investment expenditure shifts the AE Curve
parallely upward. The upward shift of AE Curve shifts the IS Curve towards right.

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