Which of the following is the least likely to take place if the Fed responds to a negative demand shock by reducing the real interest rate?
A) The IS curve shifts to the right.
B) Output gap returns to zero.
C) Inflation returns to its previous rate.
D) The MP curve shifts down.

Question

Quizplus · Accepted Answer

Reducing the real interest rate does not shift the IS curve; it moves the economy along the IS curve. The IS curve represents combinations of interest rates and output where the goods market is in equilibrium, and it shifts due to changes in fiscal policy or other factors affecting demand, not due to changes in the interest rate itself.

Which of the Following Is the Least Likely to Take