Question

When the expected future marginal product of capital increases, then the IS curve

• A. shifts up and to the right
• B. shifts down and to the left
• C. becomes steeper
• D. becomes flatter

Hint:

An increase in expected profitability boosts investment, causing the IS curve to shift rightward. Always associate higher investment expectations with a rightward IS shift.

Answer 1

The Correct Option is A

Step 1: Understanding the IS curve.
The IS curve shows combinations of interest rates and output levels at which the goods market is in equilibrium (investment equals saving).
Step 2: Effect of an increase in expected future marginal product of capital.
If firms expect a higher marginal product of capital in the future, they anticipate higher profitability from investment. This raises investment demand at each interest rate.
Step 3: Shifting of the IS curve.
An increase in investment demand raises aggregate demand, shifting the IS curve upward and to the right.
Step 4: Analyzing options.
(A) Correct — the IS curve shifts up and to the right when expected returns on capital rise.
(B) Incorrect — this occurs when expected returns fall.
(C) Incorrect — steepness depends on sensitivity to interest rates, not expectations.
(D) Incorrect — same reason as above.

Step 5: Conclusion.
Hence, when the expected future marginal product of capital increases, the IS curve shifts up and to the right.