Aggregate Demand and Supply Analysis
-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.Suppose that a combination of fiscal stimulus and recovery of consumer and business confidence shifts the IS and AD curves,as shown in the figure.The equilibrium real interest rate is ________ percent.
A)3
B)one
C)2.5
D)2
E)zero

Question

Aggregate Demand and Supply Analysis 
-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.Suppose that a combination of fiscal stimulus and recovery of consumer and business confidence shifts the IS and AD curves,as shown in the figure.The equilibrium real interest rate is ________ percent.
A)3 
B)one 
C)2.5 
D)2 
E)zero

Quizplus · Accepted Answer

A shift in the IS and AD curves indicates an increase in both aggregate demand (AD) and output. Given that output is currently below potential output, an increase in AD will stimulate the economy and lead to an increase in output. As output increases, the demand for loanable funds increases, causing the equilibrium real interest rate to increase as well. Therefore, the equilibrium real interest rate will be higher than the current rate (which is likely below 2.5%) and closer to 2.5%. Choice C is therefore the best answer.