The IS curve performs the function of illustrating the relationship between:
A)lower interest rates and higher real GDP and thus more positive output gaps.
B)higher interest rates and higher real GDP and thus more negative output gaps.
C)lower prices in the economy and higher real GDP.
D)lower incomes and lower aggregate expenditures in the economy.

Question

Quizplus · Accepted Answer

The IS curve shows the negative relationship between interest rates and real GDP. As interest rates go down, the cost of borrowing decreases and investment and consumption increase, which leads to higher real GDP and a more positive output gap.

The IS Curve Performs the Function of Illustrating the Relationship