Hi, I have failed to understand the part b and c , for part b , why cant the IS curve shifts? and for the part c) what does it mean? Please explain and elaborate , thanks

Answer each question below, supporting your responses with graphs where appropriate.

1. a)Do higher interest rates necessarily mean lower output? Explain.

No. If either the IS or the LM curve were to shift up, this would result in a higher interest rate, but in one case output rises, and in the other case output falls.

1. b)In theory, what causal effect do we expect higher interest rates to have on output in the short run?

To increase interest rates, central banks reduce the money supply, which corresponds graphically to shifting the LM curve inwards - this reduces output. To reduce interest rates, we increase the money supply and shift out the LM curve. This will increase output.

c)In practice, what empirical relationship are we likely to observe between interest rates and economic growth?

In practice, central banks often increase rates when the economy is overheating (i.e. growing strongly) because they fear that inflation will rise; on the flip side, CBs often cut rates when the economy is deteriorating. Thus in practice, the relationship we observe between interest rates and economic growth is generally the opposite of what we'd predict based on the kind of reasoning in part (b).