Question

(a) Draw a properly labeled IS-LM diagram reflecting a relatively inelastic (steep) investment curve. Label to the equilibrium interest rate (rl) and income (Y1). (b) On the same diagram drawn for part (a), draw a second IS curve going through the equilibrium point (r1,YT) reflecting a relatively elastic (flat) investment curve. You should now have one diagram with one LM-curve and two IS-curves. (c) Suppose now there is an increase in government spending. In which case (flat/steep) is the multiplier effect on income higher, and most importantly, why? [Friendly suggestion, consider a single IS curve along with a steep and a flat LM curve.]

Answer 1

Answer: (4) @ 6 Graph of isim diogram reflecting relatively inelas-tie Effeep) investment are and second is come going through the equilibrium poin't CVI, VU reflecting a relatively elogtre (flat) investment are: Graph; LM IS, Y Y2 Yay ☺ If there is an increase in government spending then the multiplier effect on income higher is: → flatter is (IS2) leads to increase in output to Yg while the steeper is leads to a ensolles increase

1 in out put till 12 The moltiplies is large in case of flatter is one multiplier = act . Itkal & so flatter the is come more is b. There is greater change in investment leading two greates multipliet effect on output