The reason for the downward-sloping IS curve is that ________.
A) lower interest rates lead to lower saving and lower output
B) lower interest rates lead to lower saving and higher output
C) higher interest rates lead to lower saving and higher output
D) all of the above
E) none of the above

Question

Quizplus · Accepted Answer

The IS curve shows the relationship between interest rates and output. Lower interest rates lead to lower saving because consumers and firms are less incentivized to save when they earn less on their savings. This increased spending leads to higher output, resulting in a downward-sloping IS curve. Option A is incorrect because lower interest rates actually lead to higher spending and output, not lower. Option C is incorrect because higher interest rates lead to higher saving and lower output, resulting in an upward-sloping IS curve. Therefore, the correct answer is B.

The Reason for the Downward-Sloping IS Curve Is That ________