Consider the IS curve . If there is no demand shock and
And
, a 1 percent increase in the real interest rate causes short-run output to:
A) fall by 2 percent.
B) rise by 4 percent.
C) fall by 4 percent.
D) fall by 0.5 percent.
E) Not enough information is given.

Question

Consider the IS curve  . If there is no demand shock and 
And 
, a 1 percent increase in the real interest rate causes short-run output to:
A) fall by 2 percent. 
B) rise by 4 percent. 
C) fall by 4 percent. 
D) fall by 0.5 percent. 
E) Not enough information is given.

Quizplus · Accepted Answer

If there is no demand shock, then the only determinant of output in the IS curve is the real interest rate. The coefficient on the real interest rate (-4) is negative, indicating that output falls when the real interest rate increases. A 1 percent increase in the real interest rate would therefore cause a 4 percent decrease in short-run output.

Consider the IS Curve