Suppose we assume , and the real interest rate rises to
) In this scenario of the IS curve, the economy would, in the short run:
A) remain at its long-run equilibrium.
B) move from 1 percent below its potential to its long-run equilibrium.
C) move from its long-run equilibrium to 1 percent above its potential.
D) move from its long-run equilibrium to 1 percent below its potential.
E) have increased output.

Question

Suppose we assume  , and the real interest rate rises to 
) In this scenario of the IS curve, the economy would, in the short run:
A) remain at its long-run equilibrium. 
B) move from 1 percent below its potential to its long-run equilibrium. 
C) move from its long-run equilibrium to 1 percent above its potential. 
D) move from its long-run equilibrium to 1 percent below its potential. 
E) have increased output.

Quizplus · Accepted Answer

An increase in the real interest rate causes a shift in the IS curve to the left, indicating a decrease in output. As a result, the economy would move from its long-run equilibrium to 1 percent below its potential in the short run.

Suppose We Assume , and the Real Interest Rate