Suppose We Assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%$

question 22

Multiple Choice

Suppose we assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%$ , and the real interest rate falls to $R _ { t } ^ { \prime } = 4 \%$ ) In this scenario of the IS curve the economy would, in the short run:

• A) remain at its long-run equilibrium
• B) have reduced output
• C) move from 1 percent below its potential to its long-run equilibrium
• D) move from its long-run equilibrium to 1 percent above its potential
• E) move from its long-run equilibrium to 1 percent below its potential

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