A) decrease the interest rate from 10 to 8 percent.
B) decrease the interest rate from 8 to 6 percent.
C) decrease the interest rate from 6 to 4 percent.
D) increase investment spending from $30 to $60 billion.

Question

A) decrease the interest rate from 10 to 8 percent. 
B) decrease the interest rate from 8 to 6 percent. 
C) decrease the interest rate from 6 to 4 percent. 
D) increase investment spending from $30 to $60 billion.

Quizplus · Accepted Answer

According to the IS-LM model, decreasing the interest rate from 8 to 6 percent would shift the IS curve to the right, increasing output and reducing the interest rate further. This would create an equilibrium point where output and interest rates are optimal. Decreasing the interest rate from 10 to 8 percent (option A) or decreasing the interest rate from 6 to 4 percent (option C) may not have as significant an impact on output and interest rates. Increasing investment spending from $30 to $60 billion (option D) would shift the IS curve to the right, but this may only be effective in the short-term and may not have a lasting impact on the economy.

A) Decrease the Interest Rate from 10 to 8 Percent