In the real intertemporal model,an adverse sectoral shock acts to
A) reduce real output and reduce the real interest rate.
B) increase real output and increase the real interest rate.
C) increase real output and reduce the real interest rate.
D) reduce real output and increase the real interest rate.

Question

Quizplus · Accepted Answer

According to the real intertemporal model, an adverse sectoral shock leads to a reduction in real output due to a decrease in total factor productivity. This reduction in output leads to a decrease in the demand for loanable funds, which causes an increase in the real interest rate. Therefore, the correct choice is D, which states that the shock reduces real output and increases the real interest rate.

In the Real Intertemporal Model,an Adverse Sectoral Shock Acts to