In an economy operating under flexible exchange rates explai

In an economy operating under flexible exchange rates, explain why the IS curve is downward sloping.

Solution

This is because the rise in the interest rate reduce the output and net exports in the country. When there is a higher interest rate this increases the cost of borrowing and reduce the disposable income and consumer spending in the economy so this will negatively affect the aggregate demand so there should be a decline in the income.

When there is a higher interest rate the investment will become more attractive in the country so this appreciate the currency. And a rise in the value of currency will promotes import and hinders the export growth.