Question

The IS curve slopes downward because a __________interest rate reduces _________and thereby income.

Select one:

a. higher, money demand

b. higher, planned investment

c. lower, planned investment

d. lower, money demand

Answer 1

IS curve indicates the relationship between the interest rate and the output or income.

IS curve slopes downward indicating a inverse relationship between interest rate and output.

When interest rate rises then cost of borrowing increases, this compels the businesses to borrow less and this leads to fall in investment spending.

As investment spending falls, the aggregate demand falls leading to fall in output and income.

So,

The IS curve slopes downward because a higher interest rate reduces planned investment and thereby income.

Hence, the correct answer is the option (b).