Consider the IS curve
If there is no demand shock and
And
,a 1 percent increase in the real interest rate causes shortrun output to:
A)fall by 2 percent.
B)rise by 4 percent.
C)fall by 4 percent.
D)fall by 0.5 percent.
E)Not enough information is given.

Question

Consider the IS curve 
If there is no demand shock and 
And 
,a 1 percent increase in the real interest rate causes shortrun output to:
A)fall by 2 percent. 
B)rise by 4 percent. 
C)fall by 4 percent. 
D)fall by 0.5 percent. 
E)Not enough information is given.

Quizplus · Accepted Answer

The IS curve shows the negative relationship between real interest rates and output. Since there is no demand shock, we can assume that the economy is at its natural level of output. Therefore, a 1 percent increase in the real interest rate will cause output to fall by 4 percent (as given in the question). So, the correct answer is C.

Consider the IS Curve