The IS curve is Y = 20 - 1.5r,and the aggregate demand curve is Y = 15.5 - 0.3π.When the inflation rate is 3 percent,output is ________.
A)20
B)14.6
C)9.5
D)3.6
E)none of the above

Question

Quizplus · Accepted Answer

Substituting 3% for π in the aggregate demand curve, we get:

Y = 15.5 - 0.3(3%) = 15.5 - 0.009 = 15.491

Substituting this value of Y in the IS curve, we can solve for r:

15.491 = 20 - 1.5r
1.5r = 20 - 15.491
1.5r = 4.509
r = 3.006

Therefore, when the inflation rate is 3%, output is approximately 14.6 (to one decimal place).

The IS Curve Is Y = 20 - 1