The IS-LM model predicts that a temporary beneficial supply shock
A)increases output, national saving, and investment, but not the real interest rate.
B)increases output, national saving, and the real interest rate, but not investment.
C)increases the real interest rate, investment, and output, but not national saving.
D)increases output, national saving, investment, and the real interest rate.

Question

Quizplus · Accepted Answer

In the IS-LM model, a temporary beneficial supply shock shifts the IS curve to the right, increasing output and national saving, but does not affect the real interest rate because it is determined by the intersection of the IS and LM curves. Investment also increases due to the increase in output, but the real interest rate remains unchanged. Therefore, option A is the correct answer. Option B is incorrect because the real interest rate increases, while investment does not. Option C is also incorrect as national saving does not increase. Option D is incorrect as the real interest rate is not affected.

The IS-LM Model Predicts That a Temporary Beneficial Supply Shock