Which of the following occurs as the economy moves leftward along a given IS curve?Select one:A.A reduction in the interest rate causes a reduction in the money supply.B.An increase in the interest rate causes investment spending to decrease.C.A reduction in the interest rate causes money demand to increase.D.A reduction in taxes causes a reduction in demand for goods.E.An increase in government spending causes a reduction in demand for goods.
Question
Which of the following occurs as the economy moves leftward along a given IS curve?Select one:A.A reduction in the interest rate causes a reduction in the money supply.B.An increase in the interest rate causes investment spending to decrease.C.A reduction in the interest rate causes money demand to increase.D.A reduction in taxes causes a reduction in demand for goods.E.An increase in government spending causes a reduction in demand for goods.
Solution
The correct answer is B. An increase in the interest rate causes investment spending to decrease.
Here's why: The IS curve represents all combinations of the interest rate and level of income where the goods market is in equilibrium (i.e., where investment equals savings). As we move leftward along the IS curve, we're looking at a decrease in the level of income/output.
One way this can happen is through an increase in the interest rate. When the interest rate increases, it becomes more expensive for firms and individuals to borrow money. This discourages investment spending because firms are less likely to take on expensive loans to finance their investment projects. As a result, investment spending decreases, which leads
Similar Questions
Suppose policy makers decide to reduce the money supply. This monetary policy action will cause which of the following to occur?Select one:A.Both the IS and LM curves shift.B.Output will change causing a change in investment and a shift of the IS curve.C.The LM curve shifts and the economy moves along the IS curve.D.The IS curve shifts and the economy moves along the LM curve.E.Neither the IS nor the LM curve shifts.
If real GDP decreases: a. there will be a downward movement along the money demand curve. b. the money demand curve will shift to the left. c. there will be an upward movement along the money demand curve. d. the money demand curve will shift to the right.
Which of the following would indicate economic growth has declined?Elimination ToolSelect one answerAThe money supply curve shifts to the right.BThe long-run aggregate supply curve shifts to the left.CThe aggregate demand curve shifts to the right.DThe short-run Phillips curve shifts to the left.EThe money demand curve shifts to the left.
Which of the following actions will shift the IS curve to the left?A.Increasing government spending on public transport.B.Implementing expansionary fiscal policy.C.Raising tax offsets.D.Raising tax rates.
An increase in the interest rate __________________.a.Shifts the aggregate demand curve to the leftb.Shifts the aggregate demand curve to the rightc.Has no effectd.Moves the economy along the aggregate demand curveClear my choice
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