Explain what effect an increase in the future expected interest rate will have on the IS curve and LM curve in the current period.

Question

Quizplus · Accepted Answer

The Answer is An increase in the future expected interest rate will cause a reduction in the present value of future disposable income and,therefore,human wealth.This causes current C to decrease and the IS curve to shift left.The increase in the future expected rate will also cause a reduction in the present value of future profits.This will cause a reduction in investment and another leftward shift in the IS curve.The LM curve will not be affected.

Explain What Effect an Increase in the Future Expected Interest