Aggregate Demand and Supply Analysis
-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If there is no policy intervention,then the figure implies that when output has reached $12 trillion,the real interest rate will be ________ percent,and the inflation rate will be ________ percent.
A)1.5;one
B)one;zero
C)zero;minus 2
D)0.5;minus one
E)2.5;three

Question

Aggregate Demand and Supply Analysis 
-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If there is no policy intervention,then the figure implies that when output has reached $12 trillion,the real interest rate will be ________ percent,and the inflation rate will be ________ percent.
A)1.5;one 
B)one;zero 
C)zero;minus 2 
D)0.5;minus one 
E)2.5;three

Quizplus · Accepted Answer

According to the graph, when output reaches the potential output level, the economy will be at the natural level of output, where the aggregate demand curve intersects with the long-run aggregate supply curve. At this point, the real interest rate will be zero (the intersection of AD and LRAS) and the inflation rate will be at the expected inflation rate of -2% (the vertical distance between the AD and LRAS curves at this point). Therefore, choice C is the correct answer.