Suppose we assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%$ , and the real interest rate rises to $R _ { t } ^ { \prime } = 6 \%$ ) In this scenario of the IS curve the economy would, in the short run:
A) remain at its long-run equilibrium
B) move from 1 percent below its potential to its long-run equilibrium
C) move from its long-run equilibrium to 1 percent above its potential
D) move from its long-run equilibrium to 1 percent below its potential
E) have increased output

Question

Suppose we assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } =  \bar { r } = 5 \%$ , and the real interest rate rises to $R _ { t } ^ { \prime } = 6 \%$ ) In this scenario of the IS curve the economy  would, in the short run:
A) remain at its long-run equilibrium
B) move from 1 percent below its potential to its long-run equilibrium
C) move from its long-run equilibrium to 1 percent above its potential
D) move from its long-run equilibrium to 1 percent below its potential
E) have increased output

Quizplus · Accepted Answer

When the real interest rate rises, it typically leads to a decrease in investment and consumption, causing the economy to move below its potential output in the short run.

Suppose We Assume aˉ=0,bˉ=1,Rt=rˉ=5%\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%aˉ=0,bˉ=1,Rt​=rˉ=5%

Suppose We Assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%$