Holding everything else constant, the IS curve will become flatter when

Question

BlackTom AI · Accepted Answer

To evaluate how the IS curve responds to changes in underlying parameters, we examine what makes the IS relationship between output (Y) and the real interest rate (r) flatter or steeper.
Option 1: 'the marginal tax rate rises' A higher marginal tax rate reduces disposable income, which shifts the consumption component and can alter the intercept of the IS curve. However, the question concerns the slope (flattening vs. steepening) with respect to r, and a tax rate change primarily affects the overall level rather than the sensitivity of output to interest rate changes. So it is not the clearest mechanism for flattening the IS slope.
Option 2: 'investment expenditure becomes less responsive to interest rates' Recall that the IS slope depends on how strongly investment reacts to r. When investment is less sensitive to r, a given change in r induces a smaller change in I, and through the national income accounting identity, this yields a smaller change in Y for a given Δr. In other words, dY/dr is smaller in magnitude, which corresponds to a flatter IS curve. This is a direct and classic driver of a flatter slope, making this option a strong candidate for the correct mechanism.
Option 3: 'investment expenditure becomes more responsive to interest rates' This would amplify the effect of an interest rate change on investment, leading to a larger change in Y for a given Δr. That means a steeper IS curve, not a flatter one. Therefore, this option works against flattening and describes the opposite effect.
Option 4: 'the marginal propensity to consume falls' The MPC determines how much income changes consumption, via the permanent-income-like channel, and thus affects the multiplier. A lower MPC reduces the multiplier, which reduces the impact of autonomous spending changes on Y for a given r. This also tends to flatten the IS curve, since dY/dr becomes smaller in magnitude when the multiplier is smaller. So, this change can produce flattening, though its effect is through the multiplier channel rather than directly through investment sensitivity.
In summary, both options 2 and 4 describe changes that can reduce the responsiveness of output to interest rate changes: option 2 through a direct reduction in investment sensitivity to r, and option 4 through a smaller multiplier via a lower MPC. Option 3 explicitly strengthens responsiveness and would steepen the IS curve, which is contrary to flattening. Option 1 affects the intercept and budget balance rather than the slope in a straightforward way and is not the primary mechanism for flattening the slope of IS in standard analyses.

ECON1045 Assessment 1: Online Test 3: 31 Mar - 4 April (23:59 Singapore Time) - Covers Weeks/Models 6 - 10

Holding everything else constant, the IS curve will become flatter when

View Explanation

Log in for full answers

Similar Questions

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

A product has a selling price of $20, a contribution margin ratio of 40% and fixed cost of $120,000. To make a profit of $30,000. The number of units that must be sold is: Type the number without $ and a comma. Eg: 20000

Which of the following statement regarding cost is correct:

Under the assumptions used in cost-volume-profit analysis, as the activity increases:

The CVP and break-even analysis are supported by a range of important assumptions. Which of the following is not an assumption of the CVP:

The break-even point is that at which:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler