Building the IS curve - 4a

What does IS stand for on the IS curve

Investment and saving

What does the IS curve show

What is going on in the market for goods and services

What does the LM curve stand for

Liquidity and Money

What does the LM curve show

Shows what is happening to the supply and demand for money

What links both the IS and LM together

What does the IS/ LM model show

The interest rate because it affects both money demand and investment

Shows the interaction between the goods market and money market and how they determine national income

Difference between how prices and income are determined in short run and long term

prices are flexible in the long run and AS determines income

While in the short run prices are sticky and AD determines income

What is actual expenditure

What is planned expenditure

Amount households, firms and governments spend - equal to GDP

Amount households, firms and government plan to spend

What is the formula for planned expenditure when the economy is closed

PE = consumption + Investment + Government spending

What is the formula which determines household consumption expenditure

C = C(Y-T)

Y - income

T - tax

Y- T = disposable income

Relationship between consumption and disposable income is called the consumption function

What is MPC

What is the formula of MPC

The amount consumption changes when disposable income increases by £1

MPC = change in consumption/ change in disposable income

Draw the slope of the MPC with axis

How do both firms and households invest

Firms : Buy investment goods to add to their capital stock and replace pre existing capital that has been worn out

Households : purchase new houses

Draw the investment function showing how interest rates affect the level of investment

Give 3 examples on what the government spends money on

Welfare, Health, education and debt interest

What is an exogenous factor

A factor determined outside of the equation/ environment

How do we show a factor is exogenous

A line above the letter

In the Keynesian cross model what is the planned expenditure formula

Draw the Keynesian cross diagram

Highlight where the equilibrium is

Draw the Keynesian curve after an increase in government spending labelling the increases in factors

How can the government spending multiplier be derived

Show why the multiplier is greater than one

What does a decrease in taxes change in the Keynesian cross diagram - draw it

This because PE = C + I + G (no t)

Show how much income increases when taxes decrease

G is not affected by tax decrease and G = I

How much will the product multiply given MPC

What usually has a bigger multiplier and why government spending or tax changes

Tax cut affects only disposable income some is consumed and the rest is saved while government spending can boost consumption and investment (through increased confidence/ subsidies)

Does tax cut work give both keynesian and supply side view

Keynesian believe it increases disposable income thus increasing AD

The supply side view is that disposable income is increased and workers supply more labour, expanding AS

What was the fiscal policy used in 2024

Tax revenue increased by £40 billion - increased capital gains tax, increased employers NI contributions, VAT on private schools

Government spending increased by £64 billion - increased budget for the NHS, spending on education, increased national wage

Why would we combine the investment curve and the keynesian cross

What does the formula look like for the IS curve

To get the IS curve as keynesian cross just assumes investment is fixed however of course it is dependent on the IS curve

Draw the IS curve

Show and explain the effect of government spending increasing on the IS curve

interest rate does not change so the IS curve shifts to the right to show that income has increased