The IS curve has a positive slope because a(n)__________ in the interest rate leads to a(n)__________ in desired investment and this leads to an increase in GDP.

Question

Quizplus · Accepted Answer

When the interest rate increases, borrowing becomes more expensive, leading to a decrease in desired investment. This in turn reduces real GDP which is why the IS curve has a negative slope. Conversely, a decrease in the interest rate makes borrowing cheaper and increases desired investment which leads to an increase in real GDP. Therefore, the slope of the IS curve is positive as GDP increases when the interest rate decreases.

The IS Curve Has a Positive Slope Because A(n)__________ in the Interest