The open-economy IS curve slopes down because any change in the foreign or home interest rate will inversely affect demand, along with a secondary effect from a change in:
A) the rate of depreciation of assets.
B) the exchange rate and the trade balance.
C) the real interest rate.
D) the growth rate of money.

Question

Quizplus · Accepted Answer

The open-economy IS curve represents the relationship between output (Y) and the real interest rate (r) in an open economy. In an open economy, changes in the foreign interest rate and exchange rate can also affect demand for goods and services, which in turn affects output. Therefore, any change in the foreign or home interest rate will inversely affect demand, along with a secondary effect from a change in the exchange rate and the trade balance. The rate of depreciation of assets (A) may also affect the economy, but it does not directly affect the IS curve. Similarly, the growth rate of money (D) may affect inflation but does not directly affect the IS curve. The real interest rate (C), which is already included in the equation for the open-economy IS curve, does not provide a secondary effect on demand, like the exchange rate and trade balance.

The Open-Economy IS Curve Slopes Down Because Any Change in the Foreign