Question

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: 
 

• A. (A), (B) and only (C)
• B. (A), (B) and (C) only
• C. (C) and (D) only
• D. (A), (B) and (D) only

Hint:

The IS curve is a critical part of Keynesian economics, showing the equilibrium in the goods market and its relationship to the interest rate and income.

Answer 1

The Correct Option is B

Step 1: IS Curve Definition. The IS curve illustrates the equilibrium condition in the goods market, delineating the relationship between the interest rate and income.

Step 2: Statement Evaluation:

• (A) The IS curve accurately represents combinations where the goods market achieves equilibrium.
• (B) Its negative slope is attributed to higher interest rates diminishing investment, consequently lowering output.
• (C) A more pronounced steepness of the IS curve arises when investment exhibits greater sensitivity to interest rate fluctuations.
• (D) An augmentation in government expenditure results in a rightward shift of the IS curve. While this is a factual statement, it is not relevant to the specific inquiry.

Step 3: Determination. Consequently, statements (A), (B), and (C) are accurate, leading to the selection of option (2).