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Some IS Exercises5.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 45IS-LM Model Biswa Swarup MisraSome IS ExercisesThe IS curve in these circumstances experiences a"double whammy"caused by increasing taxes at a timewhen the economy is exceedingly vulnerable to adversemacroeconomic policy. The intercept term falls as fragileconsumer and investor confidence plunges, and theslope gets steeper due to the increase in the tax rate asdiscussed, with IS shifting from ISoto IS1Theoppositemayalsoholdtrue.Theeuphoriagenerated by a perfectly timed tax-cut may cause theconfidence terms to soar, lifting up the intercept, andcausing the IS to flatten.
slide 47IS-LM Model Biswa Swarup MisraFactors Affecting Slope of IS CurveSlope 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