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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Definitions:

Attitude

A mental inclination demonstrated through the assessment of a specific entity with a certain level of preference or aversion.

Prejudice

An unreasonable and unfair negative attitude towards an individual or group based on stereotypes rather than actual experience.

Feasibility Studies

Assessments of the practicality of a proposed plan or project, focusing on such aspects as cost, technology, and time.

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