Consider Two Economies with the Following IS Curves, Denoted 1

question 121

Multiple Choice

Consider two economies with the following IS curves, denoted 1 and 2:
IS₁:
IS₂:
Given these two curves, the economies are identical except that they respond to interest rate changes differently. Suppose we assume
) If the real interest rate in each economy falls to
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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