Question

When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.

Short answer

It will cause downward & rightward movement along the IS curve, denoting more output at lower interest rates.

Step-by-step solution

Step 1. Introduction 

IS ie Investment Savings curve shows all the points of real interest rate & output, where goods market is at equilibrium.

The curve is downward sloping, as it shows inverse relationship between real interest rate & output level, for goods market equilibrium -

Explanation 

Federal decrease in real interest rate increases investment expenditure & net exports, which further increases aggregate demand & equilibrium output, and finally quantity of goods as per IS curve increases

This is denoted by a downward & rightward movement on the IS curve.