Figure 4-8
-If Figure above is to show the result of a "fully accommodating" monetary policy following a shift of the IS curve from IS0 to IS1, what is the initial level of real income and interest rate before these changes?
A) 3500; 7.5%.
B) 4500; 12.5%.
C) 5500; 7.5%.
D) 4500; 2.5%.

Question

Figure 4-8 
-If Figure above is to show the result of a "fully accommodating" monetary policy following a shift of the IS curve from IS0 to IS1, what is the initial level of real income and interest rate before these changes?
A) 3500; 7.5%. 
B) 4500; 12.5%. 
C) 5500; 7.5%. 
D) 4500; 2.5%.

Quizplus · Accepted Answer

The fully accommodating monetary policy implies that the central bank fully compensates for the shift in the IS curve to stabilize output at its initial level. In the figure, we see that the aggregate demand curve AD0 intersects the IS0 curve at a real income level of 5500 and an interest rate of 7.5%. Therefore, the initial level of real income and interest rate before the IS curve shift is 5500 and 7.5% respectively.

Figure 4-8 -If Figure Above Is to Show the Result of a Result