In the IS curve $\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right)$ , the term $\bar { a }$
Is called:
A) the tax rate
B) the elasticity of output with respect to the interest rate
C) a consumption expenditure shock
D) the deviation of the real interest rate to the marginal product of capital
E) an aggregate demand shock

Question

Quizplus · Accepted Answer

The term $\bar { a }$ in the IS curve represents an aggregate demand shock, which shifts the IS curve.

In the IS Curve Y~t=aˉ−bˉ(Rt−rˉ)\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right)Y~t​=aˉ−bˉ(Rt​−rˉ)

In the IS Curve $\tilde { Y } _ { t } = \bar { a } - \bar { b } \left( R _ { t } - \bar { r } \right)$