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 a decrease in GDP.

Question

Quizplus · Accepted Answer

The IS curve represents the relationship between the interest rate and GDP. When the interest rate increases, the cost of borrowing increases, leading to a decrease in desired investment by firms. This decrease in investment will lead to a decrease in aggregate demand and, therefore, a decrease in GDP. So, an increase in the interest rate leads to a decrease in GDP. Thus, the slope of the IS curve is positive.

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