In the four-part diagram used to construct the IS curve,a lower interest rate
A)has no effect on Y.
B)has no effect on the position of the demand for autonomous planned spending curve.
C)has no effect on the position of the IS curve.
D)none of the above.

Question

Quizplus · Accepted Answer

A lower interest rate shifts the demand for investment curve to the right, increasing autonomous planned spending and resulting in a higher level of output. This shift in the demand for autonomous planned spending curve causes the IS curve to shift to the right. Therefore, a lower interest rate has an effect on the position of the IS curve. Options A and B are incorrect as a lower interest rate has a positive effect on output, hence option A and B are incorrect.

In the Four-Part Diagram Used to Construct the IS Curve,a