When the IS curve is drawn with the nominal interest rate on the vertical axis, a reduction in the expected inflation rate will cause:
A) the IS curve to become flatter.
B) no change in the IS curve.
C) the IS curve to shift rightward.
D) the IS curve to become steeper.
E) the IS curve to shift leftward.

Question

Quizplus · Accepted Answer

When the expected inflation rate decreases, the real interest rate increases for any given nominal interest rate. This discourages investment and reduces the equilibrium level of income and output at any given nominal interest rate, causing the IS curve to shift leftward.

When the IS Curve Is Drawn with the Nominal Interest