If the Bank of Canada keeps the real interest rate constant,an economic shock such as a housing market crash would cause the ________,and the output gap would ________.
A) MP curve to shift up; increase
B) MP curve to shift down; decrease
C) IS curve to shift to the left; decrease
D) IS curve to shift to the right; increase

Question

Quizplus · Accepted Answer

A housing market crash would cause a decrease in investment and consumption, leading to a decrease in aggregate demand. This would result in a leftward shift of the IS curve and a decrease in the output gap. The real interest rate is kept constant in this scenario, so there would not be a shift in the MP curve.

If the Bank of Canada Keeps the Real Interest Rate