Aggregate Demand and Supply Analysis
-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If a fiscal stimulus package is implemented quickly,raising output to $12 trillion,while inflation remains constant at one percent,then the figure implies that the real interest rate will be ________ percent.
A)1.5
B)zero
C)one
D)0.5
E)2.5

Question

Aggregate Demand and Supply Analysis 
-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If a fiscal stimulus package is implemented quickly,raising output to $12 trillion,while inflation remains constant at one percent,then the figure implies that the real interest rate will be ________ percent.
A)1.5 
B)zero 
C)one 
D)0.5 
E)2.5

Quizplus · Accepted Answer

The correct answer is A because the real interest rate is equal to the nominal interest rate minus the inflation rate. In this case, the nominal interest rate is not given, but we know that the inflation rate is 1%. Therefore, the real interest rate must be 1.5% in order for the output to increase to $12 trillion.