Answer to Question #115025 in Macroeconomics for Sura Alnaimy

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

An increase interest rates increases output in the short run .As government spending increases for any given interest rate .At lower interest rates , equilibrium output in the goods market is higher .An increase in government spending shifts out the lS curve.