Suppose the parameters of the IS curve are
, and the real interest rate is initially
.
(a) Is the economy in its long-term equilibrium? Explain.
(b) Suppose the real interest rate falls to 2 percent; what happens to the short-run equilibrium, holding everything else constant?
(c) What happens to the short-run equilibrium if
falls 3 percent, holding everything else constant?
(d) What occurs if the marginal product of capital rises to 5 percent, holding everything else constant? What would cause this to happen?

Question

Suppose the parameters of the IS curve are  
, and the real interest rate is initially  
.
(a) Is the economy in its long-term equilibrium? Explain.
(b) Suppose the real interest rate falls to 2 percent; what happens to the short-run equilibrium, holding everything else constant?
(c) What happens to the short-run equilibrium if  
falls 3 percent, holding everything else constant?
(d) What occurs if the marginal product of capital rises to 5 percent, holding everything else constant? What would cause this to happen?

Quizplus · Accepted Answer

The Answer of Suppose the parameters of the IS curve are  
, and the real interest rate is initially  
.
(a) Is the economy in its long-term equilibrium? Explain.
(b) Suppose the real interest rate falls to 2 percent; what happens to the short-run equilibrium, holding everything else constant?
(c) What happens to the short-run equilibrium if  
falls 3 percent, holding everything else constant?
(d) What occurs if the marginal product of capital rises to 5 percent, holding everything else constant? What would cause this to happen?

Suppose the Parameters of the IS Curve Are