The IS Curve and Fiscal Policy Flashcards
What determines the slope of the IS curve?
The responsiveness of investment to changes in interest rates.
How does an increase in government spending affect the IS curve?
It shifts the IS curve to the right, increasing income/output.
How do higher taxes affect the IS curve?
They shift the IS curve to the left, reducing income/output.
What is fiscal policy?
Government actions regarding taxation and spending to influence economic activity.
What is the effect of expansionary fiscal policy in the IS-LM model?
It shifts the IS curve rightward, increasing income/output and possibly raising interest rates.
What is the effect of contractionary fiscal policy in the IS-LM model?
It shifts the IS curve leftward, reducing income/output and possibly lowering interest rates.
Why does fiscal policy impact the IS curve?
Because government spending and taxation influence aggregate demand.
What is the crowding-out effect?
A situation where increased government spending raises interest rates, reducing private investment.
How does fiscal policy interact with monetary policy?
The effectiveness of fiscal policy depends on the monetary policy stance and LM curve slope.
When is fiscal policy most effective in the IS-LM model?
When the LM curve is relatively flat (liquidity trap conditions).
