Answer to Question #114393 in Macroeconomics for jasmin

Question

Suppose there is an increase in interest rate. By using the Aggregate
Expenditure (AE) – Aggregate Output (Y) graph, show the effects of this change on
AE and Y in the Short-Run. Then, show the effect of increased interest rate by using
the IS curve, explain what will happen to the IS curve.

Answer 1

Increased interest rates increases aggregate expenditure and aggregate output in the short run.This is because increased intrest rate increases demand for goods and services.

The IS curve is downward sloping, as the real interest rate increases, the level of spending decreases.This causes the IS curve to shift to the right.The dependence of spending on real interest rates comes partly from investment. As the interest rate increases, spending by firms on new capital and spending by households on new housing decreases.