Explain How an Increase in the Real Interest Rate,with No

question 82

Essay

Explain how an increase in the real interest rate,with no changes to other factors that affect aggregate expenditure,impacts aggregate expenditure and how this interest rate increase is shown on the IS curve.How would this change if there was a negative demand shock with no change in the real interest rate? Show both situations using graphs for aggregate expenditure and the IS curve.

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Definitions:

Facility

A physical or virtual location where business operations occur, such as a factory, warehouse, office, or even software platforms.

Period of Time

A length or duration of moments which is measured in terms of seconds, minutes, hours, days, months, or years.

Capacity Decision

A determination made regarding the amount of production resources needed to meet expected demand.

Variable Costs

Costs that vary directly with the level of production or the volume of output.