Question

When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected?

A. The IS curve shifts to the left

B. Changes in interest rates represent a movement along the IS curve, and so the IS curve does not shift

C. The IS curve shifts to the right

D. The change in the IS curve is uncertain, as it depends on the total amount of the interest rate reduction

Answer 1

Option B.

• Changes in interest rates represent a movement along the IS curve, and so the IS curve does not shift.
• The IS curve is a curve that shows the combination of income and the Interest rates in an economy.
• When the interest rates decreases or Increases, the IS curve itself does not shift instead there will be a movement along the IS curve.
• Hence when the federal reserve reduces it's policy Interest rate, investment spending increases which leads to a movement along the IS curve, without disturbing the curve.