The reason for the downward-sloping IS curve is that ________.
A) lower interest rates lead to higher saving and higher output
B) higher interest rates lead to higher saving and lower 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 downward-sloping IS curve shows the negative relationship between interest rates and output. As interest rates increase, investment becomes more expensive and firms are less likely to undertake new projects, which leads to a decrease in output. Additionally, higher interest rates may encourage individuals to save more and consume less, further decreasing output. Therefore, the correct answer is that higher interest rates lead to higher saving and lower output.

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