EIA2002 MACROECONOMICS II SEMESTER II, SESSION 18/19 ASSIGNMENT TUTORIAL 2 PREPARED FOR : MR SAAD BIN MOHD SAID FATIQAH QALIDAH BINTI OMAR EIA170035 ADAM BIN MOHD ROSLI EIA170209 AZRUL NAZIRUL BIN MOHD ZAWAWI EIA270116 MUHAMMAD AIMAN SYAH BIN MOHAMAD ASERI EIA170089 MUHAMAD FIRDAUS BIN SYAIFUL EIA170147
QUESTION 4a) What factors determine the magnitude of slope of the IS and LM curves? The IS curve shows the equilibrium in the goods market. The condition for equilibrium in the product market is given by Y = C + I + G.An equivalent statement of this equilibrium condition could be written as I + G = S + T. Assuming that there is no government sector, the equilibrium function condition is I(r) = S(Y). There are two factors determining the magnitude of slope of the IS schedule which are interest elasticity of investment which measures how investment is affected by interest rates, and the multiplier. If the interest elasticity of investment is high, the investment curve would be flatter, hence producing a flatter IS curve, vice versa. The effect of a higher interest elasticity of investment is shown in the figure below.