The IS-LM model predicts that a temporary adverse supply shock
A)reduces output,national saving,and investment,but not the real interest rate.
B)reduces output,national saving,and the real interest rate,but not investment.
C)reduces the real interest rate,investment,and output,but not national saving.
D)reduces output,national saving,investment,and the real interest rate.

Question

Quizplus · Accepted Answer

A temporary adverse supply shock reduces output due to decreased productivity. This leads to lower national saving and investment as income falls. However, the real interest rate does not necessarily decrease because the IS-LM model suggests that the interest rate may rise due to reduced supply, maintaining equilibrium in the money market.

The IS-LM Model Predicts That a Temporary Adverse Supply Shock