Consider Two Economies with the Following IS Curves, Denoted 1 $\tilde { Y } _ { 1 t } = \bar { a } - \bar { b } _ { 1 } \left( R _ { t } - \bar { r } \right)$

question 36

Multiple Choice

Consider two economies with the following IS curves, denoted 1 and 2:
IS₁: $\tilde { Y } _ { 1 t } = \bar { a } - \bar { b } _ { 1 } \left( R _ { t } - \bar { r } \right)$
IS₂: $\tilde { Y } _ { 2 t } = \bar { a } - \bar { b } _ { 2 } \left( R _ { t } - \bar { r } \right)$
Given these two curves, the economies are identical except that they respond to interest rate changes differently. Suppose we assume $\bar { a } = 0 , \bar { b } _ { 1 } = 1 , \bar { b } _ { 2 } = 0.5 , R _ { t } = \bar { r } = 5 \%$ ) If the real interest rate in each economy falls to $R _ { t } ^ { \prime } = 4 \%$
Then:

• A) Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential
• B) Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to -0.5 percent below its potential
• C) Country 1 will move from its long-run equilibrium to -1 percent below its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential
• D) Country 1 will move from 0.5 percent below its potential to its long-run equilibrium and Country 2 will move from its long-run equilibrium to 2 percent above its potential
• E) neither country will move away from its long-run equilibrium

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Definitions:

Extension

The act of expanding something in scope, range, or length; in computing, a software addition that offers extra features or functionalities.

Dependent Variable

A variable in an experiment or study whose changes are determined by the presence or manipulation of one or more independent variables.

Parental Involvement

This term refers to the participation of parents in their children's education and learning process, which can impact academic outcomes and social development.

Grade Level

A classification that indicates the education year or complexity of course content, usually associated with school systems.