If the economy is initially in short-run equilibrium and then experiences a positive demand shock,real GDP will ________ relative to potential GDP and the real interest rate will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

A positive demand shock will increase aggregate demand in the short run, resulting in an increase in real GDP relative to potential GDP. This increase in output will lead to an increase in the demand for credit, causing an increase in the real interest rate. Therefore, the correct answer is A.

If the Economy Is Initially in Short-Run Equilibrium and Then