Consider the following model of the IS curve without an international sector:
Consumption:
Investment:
and
Government expenditure:
.
With this formulation, the IS curve is horizontal.

Question

Consider the following model of the IS curve without an international sector:
Consumption:  
Investment:  
and
Government expenditure:  
.
With this formulation, the IS curve is horizontal.

Quizplus · Accepted Answer

The IS curve shows the combinations of interest rates and output levels for which goods market equilibrium holds. It is typically downward sloping since a decrease in interest rates leads to an increase in investment and consumption, which in turn leads to a higher level of output. Therefore, the given model of the IS curve cannot be horizontal.

Consider the Following Model of the IS Curve Without an International