Introduction:

The IS-LM model is a macroeconomic framework that analyzes the relationship between interest rates, income, and output in an economy. It consists of two curves - the IS curve (Investment-Saving) and the LM curve (Liquidity Preference-Money Supply). The IS curve represents the equilibrium in the goods market, while the LM curve represents the equilibrium in the money market.

Explanation:

When the IS curve shifts to the right, it means that there is an increase in the level of investment and/or an increase in government spending, leading to an increase in aggregate demand. This shift has several effects on the economy, resulting in changes in the interest rate and income.

Effect on interest rate:

- Increased investment and government spending lead to an increase in aggregate demand.
- As aggregate demand increases, firms increase their production to meet the higher demand.
- This higher production requires additional funds, which puts upward pressure on interest rates.
- Therefore, when the IS curve shifts to the right, the interest rate increases.

Effect on income:

- As aggregate demand increases, firms increase their production to meet the higher demand.
- This increase in production leads to an increase in income and output in the economy.
- Therefore, when the IS curve shifts to the right, income increases.

Explanation of the correct answer:

The correct answer is option 'A' - interest rate increases, income increases. This is because when the IS curve shifts to the right, there is an increase in aggregate demand, leading to an increase in income and output. However, this increase in output requires additional funds, which puts upward pressure on interest rates. Therefore, both the interest rate and income increase when the IS curve shifts to the right.

Conclusion:

In the IS-LM model, a rightward shift of the IS curve indicates an increase in aggregate demand, which leads to an increase in income and output in the economy. However, this increase in output requires additional funds, putting upward pressure on interest rates. Therefore, the correct answer is option 'A' - interest rate increases, income increases.