Refer to the following figure when answering the following questions.
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 moves from point ________ to point ________.

Question

Refer to the following figure when answering the following questions.
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 moves from point ________ to point ________.

Quizplus · Accepted Answer

If the real interest rate increases, investment decreases, and output decreases. This leads to a movement along the IS curve from point d to point b. However, this also leads to an excess supply of goods and services, which puts downward pressure on prices. As a result, expected inflation decreases, shifting the LM curve downward. The intersection of the new LM curve with the IS curve occurs at point a, which represents the new short-run equilibrium.

Refer to the Following Figure When Answering the Following Questions