Question

Assume that the current demand for goods does depend on expectations. A monetary expansion in the current period will cause a rightward shift in the IS curve if:

1 Current and expected future real interest rates are positively related

2 Current and expected future real interest rates are negatively related

3 Current and expected future real interest rates are unrelated

4 Monetary policy cannot affect, directly or indirectly, the position of the IS curve in the current period

Answer 1

The answer is: 1). Current and expected future real interest rates are positively related.

The IS-LM model appears as a graph that shows the intersection of goods and the money market. The IS stands for Investment and Savings. The LM stands for Liquidity and Money. On the vertical axis of the graph, ‘r’ represents the interest rate on government bonds. The IS-LM model attempts to explain a way to keep the economy in balance through an equilibrium of money supply versus interest rates.