Interpret the slope of the IS curve. Why is IS curve normally negatively sloped?
The slope of the IS (Investment-Saving) curve reflects the sensitivity of investment and, consequently, national income to changes in the interest rate. A steeper IS curve implies that a large change in the interest rate leads to only a small change in equilibrium national income, suggesting investment is not very responsive to interest rate fluctuations. Conversely, a flatter IS curve indicates high sensitivity.
The IS curve is normally negatively sloped because there's an inverse relationship between the interest rate and investment. When the interest rate falls, the cost of borrowing for investment projects decreases, making more projects profitable. This increases investment, which in turn boosts aggregate demand through the multiplier effect, leading to a higher national income. Conversely, a rise in interest rates makes borrowing more expensive, reducing investment and thus lowering national income. This consistent inverse relationship is why we plot the IS curve as downward-sloping.
Answered By:
Sarvesh Jha
Sarvesh Jha is a seasoned government exam mentor with firsthand success in top exams like IBPS PO, SBI PO, CDS, RRB JE, SSC CGL, BPSC, and CTET. Known for his deep conceptual clarity and strategic approach, he has guided over 5000 students through personalized mentorship. He has been creating well researched content for last 5 years.
Similar Questions
Suppose that the market demand and supply functions are given by:
Qd = -500P + 5000
and Qs = 400P-400
Find out the effects of imposition of specific sales tax of 18% on equilibrium price and quantity.Consider a firm in a Duopoly market with product differentiation in which, Duopolist I faces a demand function given by:
\(p_1 = 200 - 4q_1 - 2q_2\)The cost function of Duopolist I is:
\(c_1 = 5q_1^2\)Assume that Duopolist II has \(\frac{1}{3}\)rd share of the whole market.
Find out optimal price, output and profit for Duopolist I. Also find out the output of Duopolist II.In a monopoly market, the demand and cost curves are given by:
p = 200 - 8q
and c = 25 + 10q
Suppose that the government imposes a tax of 10 per unit. How will equilibrium price and quantity be affected?Show that when prices and income increase in the same proportion, there will be no change in quantity demanded for a commodity in Marshallian approach.
What is classical dichotomy ? Is it the same as neutrality of money? Explain.
What are the major reasons for market failure ? Explain the role of the government in this context.
What are the determinants of velocity of money in Fisher's equation ? How does it differ from the Cambridge version of velocity of money?
What is Scitovsky Paradox? Explain it in the context of Kaldor-Hicks compensation test.
Derive Marshallian demand curve for an inferior good in a two-commodity framework by using income and substitution effects. Is this demand curve always negatively sloped ? Explain.
How does the loanable fund theory become superior to the classical theory of interest?
Important Questions from Miscellaneous
Write a note in 150 words
Mendelian and non-Mendelian traits.Write a note in 150 words
Theoretical significance of Purum kinship-system.Write a note in 150 words
Smell as a signal among non-human primates.Write a note in 150 words
Osteodontokeratik culture and its makers.Discuss the Miocene hominoid remains and their significance in evolution.
