Which of the following statements are correct about the IS curve?
(A) It shows the combination of the interest rate and the level of income such that the money market is in equilibrium.
(B) It is negatively sloped.
(C) The smaller the multiplier and the more sensitive investment spending is to changes in the interest rate, the steeper the IS curve.
(D) An increase in government purchases shifts the IS curve to the right.
Choose the correct answer from the options given below:
Which of the following statements are correct about the IS curve?
(A) It shows the combination of the interest rate and the level of income such that the money market is in equilibrium.
(B) It is negatively sloped.
(C) The smaller the multiplier and the more sensitive investment spending is to changes in the interest rate, the steeper the IS curve.
(D) An increase in government purchases shifts the IS curve to the right.
Choose the correct answer from the options given below:
Show Hint
- (A), (B) and only (C)
- (A), (B) and (C) only
- (C) and (D) only
- (A), (B) and (D) only
The Correct Option is B
Solution and Explanation
Step 1: IS Curve Explanation.
The IS curve represents the equilibrium in the goods market, showing the relationship between the interest rate and income.
Step 2: Statement Analysis:
- (A) The IS curve indeed shows combinations where the goods market is in equilibrium.
- (B) It is negatively sloped because higher interest rates reduce investment, leading to lower output.
- (C) A steeper IS curve occurs when investment is more sensitive to interest rates.
- (D) An increase in government spending shifts the IS curve to the right, which is a true statement but does not apply to this question's focus.
Step 3: Conclusion.
Thus, the correct statements are (A), (B), and (C), so the correct answer is (2).
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