Refer to the following figure when answering the following questions.
Figure 11.6: IS Curve
-Consider the IS curve in Figure 11.6. If the interest rate increases and there is a positive aggregate demand shock, the economy would move from point e to point:
A) d.
B) c.
C) a.
D) b.
E) f.

Question

Refer to the following figure when answering the following questions.
Figure 11.6: IS Curve 
-Consider the IS curve in Figure 11.6. If the interest rate increases and there is a positive aggregate demand shock, the economy would move from point e to point:
A) d. 
B) c. 
C) a. 
D) b. 
E) f.

Quizplus · Accepted Answer

An increase in the interest rate would typically move the economy up along the IS curve (reducing investment and hence aggregate demand), while a positive aggregate demand shock would shift the IS curve to the right. The combination of these two effects would move the economy to a point like "a," which is both higher (due to increased interest rates) and to the right (due to the positive demand shock) compared to the original equilibrium point "e."

Refer to the Following Figure When Answering the Following Questions