Refer to the following figure when answering the following questions.
Figure 14.3: AS/AD Model

-Consider Figure 14.3. Between 2006 and 2007 the:
A) real interest rate was negative.
B) 10-year-bonds' nominal interest rate was lower than inflation.
C) real interest rate was higher than the nominal interest rate.
D) real interest rate was positive.
E) None of these answers is correct.

Question

Refer to the following figure when answering the following questions.
Figure 14.3: AS/AD Model

-Consider Figure 14.3. Between 2006 and 2007 the:
A) real interest rate was negative. 
B) 10-year-bonds' nominal interest rate was lower than inflation. 
C) real interest rate was higher than the nominal interest rate. 
D) real interest rate was positive. 
E) None of these answers is correct.

Quizplus · Accepted Answer

In the AS/AD model, the vertical axis represents the price level, while the horizontal axis represents real GDP. The intersection of the aggregate supply (AS) and aggregate demand (AD) curves gives us the equilibrium price level and real GDP. In this figure, we can see that the equilibrium occurred at a positive price level and real GDP in 2006 and 2007. This means that the real interest rate in those years was positive. Choices A and B are incorrect because we cannot determine the real interest rate or inflation rate from this figure alone. Choice C is also incorrect because the real interest rate cannot be higher than the nominal interest rate.

Refer to the Following Figure When Answering the Following Questions