Refer to the following figure when answering
Figure 11.5: IS Curve
-Consider Figure 11.5. If the economy initially is at its long-run equilibrium and the real interest rate increases, the economy:
A) moves from point b to point a
B) moves from point d to point a
C) moves from point d to point b
D) moves from point a to point d
E) moves from point d to point c

Question

Refer to the following figure when answering  
Figure 11.5: IS Curve 
-Consider Figure 11.5. If the economy initially is at its long-run equilibrium and the real interest rate increases, the economy:
A) moves from point b to point a 
B) moves from point d to point a 
C) moves from point d to point b 
D) moves from point a to point d 
E) moves from point d to point c

Quizplus · Accepted Answer

An increase in the real interest rate leads to a decrease in investment spending, which in turn reduces aggregate output. This shift is represented by the movement from point d to b on the IS curve. As a result, the economy moves away from its long-run equilibrium at point a, and unemployment rises above its natural rate.

Refer to the Following Figure When Answering