In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts up and to the right,and the Fed wants to keep output unchanged in the short run and the price level unchanged in the long run,it will
A)shift the LR curve up.
B)not shift the LR curve.
C)shift the LR curve down.
D)shift the IS curve up and to the right.

Question

Quizplus · Accepted Answer

If the IS curve shifts up and to the right, there will be a higher nominal interest rate and a lower level of output. To keep output unchanged in the short run, the Fed will need to increase the money supply, which will lower the real interest rate. However, if the Fed wants to keep the price level unchanged in the long run, they will eventually need to undo this increase in the money supply by decreasing it in the long run. This means the long-run aggregate supply (LRAS) curve will shift up. Therefore, the Fed will need to shift the LR curve up to maintain the target real interest rate.

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