LECTURE 16
Q: Resources of shift in IS curve or what are the reasons of
rise and fall in IS curve
Rise and fall in IS curve may be due to change in any
component of AD while rate of interest remaining the constant. These reasons
can be explain with the help of following diagrams.
There are two possibilities for shifting in IS curve.
·
IS curve shift upward
·
IS curve shift downward
Resources of change in IS curve.
(1) the IS curve
shift right upward due to change in consumption. IS curve may go downward due
to lake of consumption.
(2) Due to change in
taxis, consumption will be change. if taxis reduce consumption will increase and
when consumption increase IS also shift upward. Consumption decrease IS
go down ward.
(3) due to change in induced investment. IS
maybe shifted upward or downward.
(4) If putting an amount of government expenditure
in economy IS may rise or fall. while rate of interest remaining constant.
Figures
16.1
Explanation
in Part (a) of the diagram AS is aggregate supply
curve which draw as 45o line from origin. AD which have three
component consumption, investment and government expenditure. AD
intersect AS at point E0. if we draw a vertical line on x-axis level of
income is y0. in Part (b) i0 rate of interest IS0 is formed with i0 and y0. we draw IS curve with the help of single point
B. when we increase our consumption aggregate demand curve shift upward and cut
AS curve at point E1, at this level of national income is y1 which is above
level of income then y0. we get Part (c) for IS1curve in Part (b). there is an other possibility that
if any component of AD is reduced then AD curve fall downward. our income level
will be reduce at y2 which is below the y0 level but at same level of rate of interest IS2
curve shift down ward with negatively sloping. In above discussion we see that
if any component of AD is change the level of national income also changed and IS
curve maybe shifted upward or downward.
Derivation Equation
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