17. An explanation for the slope of the IS curve is that as the interest rate...
17. An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income. A) increases; downward B) increases; upward C) decreases; upward D) decreases; downward E) none of the above
18. According to the theory of liquidity preference, the supply of real money balances: A) decreases as the interest rate increases. B) increases as the interest rate increases. C) increases as income increases. D) is fixed.
Homework Answers
(17) An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment decreases, and this shifts the expenditure function downward, thereby decreasing income.
There is a negative relationship between interest rate and investment demand, a rise in interest rate will decrease the investment and as a investment falls the expenditure function shifts downward.
Answer: Option (D)
(18) According to the Liquidity Preference theory the supply of real money balances is fixed and demand of real money balances is negatively related with interest rate.
Answer: option (D).
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17. An explanation for the slope of the IS curve is that as the
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