In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts to the left,and the Fed wants to keep output unchanged
A)taxes will increase.
B)the money supply will decline.
C)the real interest rate will decrease.
D)taxes will decrease.

Question

Quizplus · Accepted Answer

If the IS curve shifts to the left, it means that there is a decrease in output, which is undesired by the Fed. In order to counteract this, the Fed would have to decrease the real interest rate to stimulate investment and consumption. This can be done by increasing the money supply, which lowers interest rates, or by decreasing taxes, which increases disposable income and consumption. However, since the question specifies that the Fed wants to keep output unchanged, the only option left is to decrease the real interest rate. Therefore, the correct choice is C.

In the Keynesian Model,suppose the Fed Sets a Target for the Real