Assume the economy is initially in equilibrium where potential GDP equals real GDP.If the economy experiences a positive demand shock,increasing consumer optimism,and the Bank of Canada does not change its target short-term nominal interest rate,the ________ shifts to the right and the output gap will be ________.
A) IS curve; positive
B) IS curve; negative
C) MP curve; positive
D) MP curve; negative

Question

Quizplus · Accepted Answer

A positive demand shock would shift the IS curve to the right, indicating an increase in aggregate demand. Since the economy was initially in equilibrium, the increase in aggregate demand would lead to an increase in real GDP above potential GDP, creating a positive output gap. The MP (monetary policy) curve is not directly affected by a demand shock, so choices C and D can be ruled out.

Assume the Economy Is Initially in Equilibrium Where Potential GDP