The Dow Jones Industrial Average rose more than 1,080 points on December 26, 2018. How does a change like this impact the IS curve?
A)The increase in perceived wealth will lead to an increase in taxes, which will cause a left shift of the IS curve.
B)The increase in the real interest rate lowers consumption, which causes a movement down and to the right along the same IS curve.
C)The increase in perceived wealth lowers consumption, which shifts the IS curve to the left.
D)The increase in perceived wealth boosts consumption, which shifts the IS curve to the right.

Question

Quizplus · Accepted Answer

An increase in the Dow Jones Industrial Average reflects an increase in perceived wealth and leads to a boost in consumption. This, in turn, shifts the IS curve to the right as shown by the equation Y = C(Y-T(Y)) + I(r) + G. As consumption increases, the level of output (Y) also increases, leading to a rightward shift of the IS curve.

The Dow Jones Industrial Average Rose More Than 1,080 Points