Suppose there is an increase in the expected future interest rate. This will cause which of the following to occur?
A) The IS curve to shift left in the current period.
B) The IS curve to shift right in the current period.
C) The LM curve to shift up in the current period.
D) The LM curve to shift down in the current period.
E) Both the IS and LM curves to shift left in the current period.

Question

Quizplus · Accepted Answer

An increase in the expected future interest rate shifts the IS curve to the left in the current period. This is because an expected increase in future interest rates decreases current investment and consumption demand, causing a decrease in output and shifting the IS curve to the left. The LM curve remains unchanged in this scenario.

Suppose There Is an Increase in the Expected Future Interest