In the IS curve ________.
A) an increase in the interest rate constitutes an upward movement along the curve
B) an increase in aggregate consumption constitutes a downward movement along the curve
C) an increase in taxes constitutes a rightward shift of the curve
D) all of the above
E) none of the above

Question

Quizplus · Accepted Answer

The IS curve shows the relationship between the interest rate and output (or income) in the goods market. An increase in the interest rate means that the cost of borrowing increases, which reduces investment and consumption spending, leading to a decrease in output (or income). Therefore, an increase in the interest rate constitutes an upward movement along the IS curve, and a decrease in the interest rate constitutes a downward movement along the curve. Options B and C are incorrect because an increase in aggregate consumption and a decrease in taxes, respectively, would shift the IS curve to the right, but would not constitute a movement along the curve itself.

In the IS Curve ________