Some IS Exercises
5.How would the IS react to increases in tax rates in aneconomystrugglingtorecoverfromaprolongedrecession? Or how would an economy, nervously eyeingan approaching slowdown, react to tax increases?

slide 45
IS-LM Model
Biswa Swarup Misra
Some IS Exercises
The IS curve in these circumstances experiences a
"double whammy"
caused by increasing taxes at a time
when the economy is exceedingly vulnerable to adverse
macroeconomic policy. The intercept term falls as fragile
consumer and investor confidence plunges, and the
slope gets steeper due to the increase in the tax rate as
discussed, with IS shifting from IS
o
to IS
1
The
opposite
may
also
hold
true.
The
euphoria
generated by a perfectly timed tax-cut may cause the
confidence terms to soar, lifting up the intercept, and
causing the IS to flatten.

G

slide 47
IS-LM Model
Biswa Swarup Misra
Factors Affecting Slope of IS Curve
Slope of IS curve
Value of f
Slope of IS curve
High
Flat
Low
Steep
Value of MPC
Slope of IS curve
High
Flat
Low
Steep
Value of t
Slope of IS curve
High
Steep
Low
Flat
Value of Multiplier
Slope of IS curve
High
Flat
Low
Steep