Shift in IS Curve:
The study of shifters becomes important especially because any shift in the position of either IS or LM curve will cause a change in the equilibrium level of income. The shift in IS Curve can occur for a number of reasons, all of them involving a change in aggregate demand for goods and servicesthat is completely inde[endent of interest rate and the level of income./
1. Level of Government Expenditure (G):
A decrease in G shifts IS curve to the leftof its original positionwhereas an increase in G will cause a shft towards right irrespective of the level of income and rate of interest. This is because an increase in G increases government expenditure and the level of aggregate demand and a decrease in G will do just opposite. The position of shift will depend on the expenditure multiplier (1/1-b).
2. Changes in Taxes:
Changes in taxes also cause a shift in IS curve. On increase of taxes the level of disposable income decreases. This will shift IS curve to the left.the shift per unit of increase in T is (-b/1-b)i.e. equal to tax multiplier.
3. Autonomous changes in Investment:
Another factor that shifts IS curve is an autonomous change in the investment. This is possible in case of an increase in expectations about the future profitability of investment. Just like an increase in G increase in autonomous investment will shift the curve position towards rightby the amount of increase.
4. Increase in Exogenous Exports and Imports:
An increase in exogenous export will shift the IS curve to the right while an increase in autonomous imports will shift IS curve to the left.
Prof. (Dr.) M.K.Ghadoliya
The study of shifters becomes important especially because any shift in the position of either IS or LM curve will cause a change in the equilibrium level of income. The shift in IS Curve can occur for a number of reasons, all of them involving a change in aggregate demand for goods and servicesthat is completely inde[endent of interest rate and the level of income./
1. Level of Government Expenditure (G):
A decrease in G shifts IS curve to the leftof its original positionwhereas an increase in G will cause a shft towards right irrespective of the level of income and rate of interest. This is because an increase in G increases government expenditure and the level of aggregate demand and a decrease in G will do just opposite. The position of shift will depend on the expenditure multiplier (1/1-b).
2. Changes in Taxes:
Changes in taxes also cause a shift in IS curve. On increase of taxes the level of disposable income decreases. This will shift IS curve to the left.the shift per unit of increase in T is (-b/1-b)i.e. equal to tax multiplier.
3. Autonomous changes in Investment:
Another factor that shifts IS curve is an autonomous change in the investment. This is possible in case of an increase in expectations about the future profitability of investment. Just like an increase in G increase in autonomous investment will shift the curve position towards rightby the amount of increase.
4. Increase in Exogenous Exports and Imports:
An increase in exogenous export will shift the IS curve to the right while an increase in autonomous imports will shift IS curve to the left.
Prof. (Dr.) M.K.Ghadoliya
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