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Why is the IS curve negatively sloped?
- a)An increase in interest rates increases investment spending.
- b)A decrease in interest rates decreases investment spending.
- c)A higher interest rate reduces aggregate demand.
- d)A lower interest rate reduces aggregate demand.
Correct answer is option 'C'. Can you explain this answer?
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Why is the IS curve negatively sloped?a)An increase in interest rates ...
The IS curve is negatively sloped because a higher interest rate reduces investment spending, leading to lower aggregate demand and income.
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Why is the IS curve negatively sloped?a)An increase in interest rates ...
Explanation:
Investment spending is a component of aggregate demand that is sensitive to changes in interest rates. When interest rates are higher, the cost of borrowing for investments increases, making it more expensive for businesses to finance projects. This leads to a decrease in investment spending, which in turn reduces overall aggregate demand in the economy.
Reasons for the negatively sloped IS curve:
- Higher interest rates reduce investment spending: As mentioned earlier, an increase in interest rates leads to a decrease in investment spending, which negatively impacts aggregate demand.
- Impact on consumption: Higher interest rates can also lead to higher borrowing costs for consumers, reducing their disposable income and spending, further lowering aggregate demand.
- Effect on net exports: When interest rates rise, the domestic currency tends to strengthen, making exports more expensive for foreign buyers and imports cheaper for domestic consumers. This can lead to a decrease in net exports, contributing to the negative slope of the IS curve.
In summary, the negative slope of the IS curve is a result of the relationship between interest rates, investment spending, consumption, and net exports in the economy. As interest rates rise, these components are adversely affected, leading to a decrease in aggregate demand and a negatively sloped IS curve.
Investment spending is a component of aggregate demand that is sensitive to changes in interest rates. When interest rates are higher, the cost of borrowing for investments increases, making it more expensive for businesses to finance projects. This leads to a decrease in investment spending, which in turn reduces overall aggregate demand in the economy.
Reasons for the negatively sloped IS curve:
- Higher interest rates reduce investment spending: As mentioned earlier, an increase in interest rates leads to a decrease in investment spending, which negatively impacts aggregate demand.
- Impact on consumption: Higher interest rates can also lead to higher borrowing costs for consumers, reducing their disposable income and spending, further lowering aggregate demand.
- Effect on net exports: When interest rates rise, the domestic currency tends to strengthen, making exports more expensive for foreign buyers and imports cheaper for domestic consumers. This can lead to a decrease in net exports, contributing to the negative slope of the IS curve.
In summary, the negative slope of the IS curve is a result of the relationship between interest rates, investment spending, consumption, and net exports in the economy. As interest rates rise, these components are adversely affected, leading to a decrease in aggregate demand and a negatively sloped IS curve.
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Why is the IS curve negatively sloped?a)An increase in interest rates increases investment spending.b)A decrease in interest rates decreases investment spending.c)A higher interest rate reduces aggregate demand.d)A lower interest rate reduces aggregate demand.Correct answer is option 'C'. Can you explain this answer?
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