According to the IS curve, when interest rates rise, ________ and ________.
A) governments borrow less; firms produce less
B) firms and households borrow more; firms produce less
C) firms and households borrow less; firms produce less
D) firms and households borrow more; firms produce more
E) firms and households borrow more; governments produce more

Question

Quizplus · Accepted Answer

The IS curve shows the relationship between interest rates and GDP. When interest rates rise, it becomes more expensive to borrow money, which discourages firms and households from taking out loans. This, in turn, leads to a decrease in investment and consumption spending, lowering GDP and ultimately resulting in firms producing less. The governments' borrowing behavior is not directly related to the IS curve.

According to the IS Curve, When Interest Rates Rise, ________