The economy's IS curve has a downward slope because
A) when output is too high, firms cut investment to reduce inventory
B) as income rises, consumption rises and saving falls
C) as interest rates rise, investment decreases
D) as uncertainty increases, saving rises and consumption falls
E) as government purchases rise, interest rates fall

Question

Quizplus · Accepted Answer

The IS curve shows the relationship between output (Y) and the interest rate (r) at which the goods market is in equilibrium (planned expenditure equals output). A decrease in interest rates stimulates investment spending, which in turn raises output. Conversely, an increase in interest rates decreases investment spending and output. Therefore, the IS curve has a negative slope, indicating that higher interest rates lead to lower output levels.

The Economy's IS Curve Has a Downward Slope Because