The IS Curve

CFA Level I
#1

It says that other things held constant, higher income causes the fiscal deficit (G-T) to decrease, or a fiscal surplus to increase, b/c taxes increase with income.

I understand the part where higher income causes the fiscal deficit to decrease because Higher Income = Higher taxes.

So example G= 5 and T = 7. Deficit = 5-7 = -2. So… with higher income (and then higher taxes) … Deficit = 5-8= -3 so the fiscal deficit decreases.

I don’t understand how it will cause a fiscal surplus to Increase.

Example G=5 and T=2. Surplus = 5-2 = 3. So… once again with higher income (and then higher taxes)… Surplus = 5-3= 2 … By doing this it appears that the surplus also decreases…

What am I missing here? Am I doing this completley wrong?

#2

Your second example is wrong. For fiscal surplus T>G.

#3

I still dont understand . uh

#4

The surplus is T − G = 2 − 5 = -3. The next surplus is T − G = 3 − 5 = -2. The surplus _ increases _ (from -3 to -2).

#5

G = Government expenditure, and T = Government tax revenue, so if G =5, and T = 2, then surplus = 2-5 = -3

from the second equation like S2000magician wrote is 3-5 = -2, so as government tax revenue increases, and surplus increases from -3 to -2.

#6

Thanks guys I get it now!

#7

If G=5 (Gov.consumption)

T=2 (Collected taxes)

If T-G = -3

There is no surplus, it is a budget deficit.

#8

Good to hear!