ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In contrast, with a decrease in real interest rates, investments will rise. Thus, a decrease in the real interest rates will move the economy downwards along the existing investment demand curve because the fall in the real interest rates will depict higher investments on a negatively sloped investment demand curve.

Detailed explanation-2: -A decline in the real interest rate means lower investment costs. As a result, the investment will increase. Other things being constant, a higher investment expenditure will boost the overall spending of the economy.

Detailed explanation-3: -Generally a decrease in real interest rates stimulates personal consumption, which is what Professor Krugman has pointed out. When the real interest rate goes down, in other words, the magnitude of the substitution effect, which stimulates consumption, outweighs that of the income effect, which reduces interest income.

Detailed explanation-4: -The IS curve is downward sloping because as the interest rate falls, investment increases, thus increasing output. The LM curve describes equilibrium in the market for money. The LM curve is upward sloping because higher income results in higher demand for money, thus resulting in higher interest rates.

Detailed explanation-5: -The investment demand curve shifts right when real interest rates decrease because it reduces the amounts attracted by loans enabling consumers to increase their purchase power thus, increasing the demand for investments.