The effect of a drop in business confidence on the evaluation of MPK shifts the IS curve to the ________.Suppose the LM curve is fixed.The resulting ________ in the interest rate works through the accelerator model to ________ the fall in equilibrium output.

Question

Quizplus · Accepted Answer

A drop in business confidence leads to a leftward shift in the IS curve. Assuming the LM curve is fixed, this results in a fall in the interest rate (not a rise as in options A and B) to offset part of the fall in equilibrium output through the accelerator model. Therefore, option C is the best choice. Option D is incorrect because a right shift in the IS curve actually leads to a fall in the interest rate. Option E is also incorrect because it suggests that the fall in equilibrium output will be more than offset, which is not plausible.

The Effect of a Drop in Business Confidence on the Evaluation