Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3.A positive demand shock with no change in the real interest rate is best represented by ________ in panel (a)and ________ in panel (b). A) a shift from AE₃ to AE₂; a shift from IS₂ to IS₁ B) a shift from AE₂ to AE₃; a shift from IS₁ to IS₂ C) a shift from AE₁ to AE₂; a movement from point A to point B D) a shift from AE₁ to AE₃; a movement from point A to point C

Question

Quizplus · Accepted Answer

A positive demand shock would shift the aggregate expenditure (AE) curve to the right, from AE₂ to AE₃, in panel (a) as households and firms increase their spending. This would lead to an increase in output (Y) and a higher equilibrium interest rate. In panel (b), the increase in output and income (Y) would shift the IS curve from IS₁ to IS₂ as there is more demand for goods and services. This maintains the equilibrium interest rate at its original level, as there is no change in the real interest rate. Thus, choice B is the best option.

Figure 10.3 Panel (A) Panel (B)