Consider two economies with the following IS curves,denoted 1 and 2:
IS1:
IS2:
Given these two curves,the economies are identical except that they respond to interest rate changes differently.Suppose we assume
,b±1 = 1,
,
)If the real interest rate in each economy falls to
,then:
A)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential.
B)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to -0.5 percent below its potential.
C)Country 1 will move from its long-run equilibrium to -1 percent below its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential.
D)Country 1 will move from 0.5 percent below its potential to its long-run equilibrium and Country 2 will move from its long-run equilibrium to 2 percent above its potential.
E)Neither country will move away from its long-run equilibrium.

Question

Consider two economies with the following IS curves,denoted 1 and 2:
IS1: 
IS2: 
Given these two curves,the economies are identical except that they respond to interest rate changes differently.Suppose we assume 
,b±1 = 1, 
, 
)If the real interest rate in each economy falls to 
,then:
A)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential. 
B)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to -0.5 percent below its potential. 
C)Country 1 will move from its long-run equilibrium to -1 percent below its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential. 
D)Country 1 will move from 0.5 percent below its potential to its long-run equilibrium and Country 2 will move from its long-run equilibrium to 2 percent above its potential. 
E)Neither country will move away from its long-run equilibrium.

Quizplus · Accepted Answer

The Answer of Consider two economies with the following IS curves,denoted 1 and 2:
IS1: 
IS2: 
Given these two curves,the economies are identical except that they respond to interest rate changes differently.Suppose we assume 
,b±1 = 1, 
, 
)If the real interest rate in each economy falls to 
,then:
A)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential. 
B)Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to -0.5 percent below its potential. 
C)Country 1 will move from its long-run equilibrium to -1 percent below its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential. 
D)Country 1 will move from 0.5 percent below its potential to its long-run equilibrium and Country 2 will move from its long-run equilibrium to 2 percent above its potential. 
E)Neither country will move away from its long-run equilibrium.

Consider Two Economies with the Following IS Curves,denoted 1 and 2