In the IS-LM model, which two variables are influenced by the interest rate?
A)supply of nominal money balances and demand for real balances
B)demand for real balances and government purchases
C)supply of nominal money balances and investment spending
D)demand for real money balances and investment spending

Question

Quizplus · Accepted Answer

In the IS-LM model, the interest rate affects the demand for real money balances (as individuals and firms may alter their money holdings based on the rate of return on alternative assets) and investment spending (as higher interest rates increase the cost of borrowing and may discourage investment). The supply of nominal money balances is typically assumed to be fixed in the short run. Government purchases may also be affected by the interest rate, but this is not one of the options given in the question.

In the IS-LM Model, Which Two Variables Are Influenced by the Interest