Answer to Question #278959 in Macroeconomics for Vageesha

Question

Between January and December 1991, while the U.S. economy was falling deeper into its recession, the interest rate on Treasury bills fell from 6.3 percent to 4.1 percent. Use the IS-LM model to explain this pattern of declining output and interest rates. Which curve must have shifted? Can you think of a reason—historically valid or simply imagined—that this shift might have occurred?

Answer 1

The decline in both output and interest rates is a result of decrease and leftward shift of IS curve.

Possible reasons may be a decrease in government spending or investment.