What does the IS curve represent?
The combinations of real interest rates and output where the goods market is in equilibrium.
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| Term | Definition |
|---|---|
| What does the IS curve represent? | The combinations of real interest rates and output where the goods market is in equilibrium. |
| What is aggregate demand in this context? | The total planned expenditure in the economy. |
| What are the four components of aggregate demand? | Consumption, investment, government spending, and net exports. |
| What is planned expenditure? | Total desired spending at a given interest rate and income. |
| What happens to aggregate demand when interest rates rise? | It decreases. |
| What is the consumption function? | It shows how consumption depends on disposable income. |
| What is disposable income? | Income after taxes are subtracted and transfers added. |
| What are 'animal spirits'? | Business confidence or expectations influencing investment. |
| How do taxes affect aggregate demand? | Higher taxes reduce disposable income and consumption. |
| What is the impact of government purchases on aggregate demand? | They directly increase aggregate demand. |
| How do financial frictions affect investment? | They raise effective interest rates and reduce investment. |
| What causes shifts in the IS curve? | Changes in autonomous spending, taxes, government spending, and financial frictions. |
| What happens when government spending increases? | The IS curve shifts right. |
| What happens when taxes increase? | The IS curve shifts left. |
| What happens when financial frictions increase? | The IS curve shifts left. |
| What happens when consumer confidence increases? | The IS curve shifts right. |
| Why does the IS curve slope downward? | Because higher real interest rates lower investment and output. |
| What happens when net exports increase? | The IS curve shifts right. |
| What is equilibrium in the goods market? | When output equals aggregate demand. |
| How is planned investment affected by interest rates? | It decreases as interest rates rise. |
| What does 'autonomous consumption' mean? | Spending that is independent of income. |
| What does 'autonomous investment' mean? | Investment independent of interest rates or income. |
| What is the effect of a fall in taxes on the IS curve? | It shifts to the right. |
| What does an increase in exports do to the IS curve? | Shifts it right. |
| What do higher financial frictions do to equilibrium output? | They lower it. |
| What is the formula for aggregate demand? | Yad = C + I + G + NX. |
| What happens to planned investment during recessions? | It typically falls due to pessimism and higher frictions. |
| What can cause the IS curve to shift left? | Decreases in spending, investment, or exports, or increases in frictions. |
| What is the intuition behind the IS curve? | It shows how output adjusts when interest rates change to maintain equilibrium. |
| What happens when interest rates fall? | Aggregate demand and output rise. |
| What role does government policy play in shifting the IS curve? | Fiscal policies alter spending and taxation, shifting IS. |
| What does an expansionary fiscal policy do? | Shifts IS to the right. |
| What does a contractionary fiscal policy do? | Shifts IS to the left. |
| What happens when business expectations improve? | Investment rises, shifting IS right. |
| What happens when imports increase relative to exports? | Aggregate demand decreases, shifting IS left. |
| How are autonomous factors different from induced ones? | Autonomous factors don’t depend on income or output. |
| What are the main variables in the IS curve? | Interest rate (r) and output (Y). |
| What does a point on the IS curve represent? | Equilibrium in the goods market for a given interest rate. |
| What is the relationship between IS curve and aggregate demand? | Shifts in IS correspond to shifts in the aggregate demand curve. |
| How do wars typically affect the IS curve? | They increase government spending, shifting IS right. |
| What is the effect of fiscal stimulus packages? | They boost demand, shifting IS right. |
| Why does the economy move toward equilibrium? | Because unplanned inventory changes cause output adjustments. |
| What does the slope of the IS curve depend on? | The interest sensitivity of investment and net exports. |
| What happens when foreign demand increases? | Net exports rise, shifting IS right. |
| What is financial friction? | Barriers that make borrowing costlier, reducing spending. |
| What causes movements along the IS curve? | Changes in the interest rate only |