Suppose we assume $\bar { a } = 0 , \bar { b } = 1 , R _ { t } = \bar { r } = 5 \%$ , and the real interest rate falls to $R _ { t } ^ { \prime } = 4 \%$ ) In this scenario of the IS curve the economy would, in the short run:
A) remain at its long-run equilibrium
B) have reduced output
C) move from 1 percent below its potential to its long-run equilibrium
D) move from its long-run equilibrium to 1 percent above its potential
E) move from its long-run equilibrium to 1 percent below its potential

Question

Quizplus · Accepted Answer

A decrease in the real interest rate from 5% to 4% would typically stimulate investment and consumption, leading to an increase in output, moving the economy from its long-run equilibrium to 1 percent above its potential.

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