Along an IS curve as interest rates __________, income must be __________ so that saving, which is a positive function of income, can be lower to equal the smaller level of investment.

Question

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As interest rates decline, investment demand increases, which leads to a higher level of equilibrium income. However, saving is a function of income that is positively related, meaning that an increase in income leads to an increase in saving. Therefore, to reach the new equilibrium level of income, saving must decrease, which means that income must be lower.

Along an IS Curve as Interest Rates __________, Income Must