In the IS curve: y = ̄a − ̄b(r − ̄r) Suppose the parameters are ̄a = 0, ̄b = 1/2, ̄r = 2% and the interest rate is initially r = 3%. Explain what happens to the short-run output gap in each of the following scenarios (consider each separately): 1. The real interest rate rises from 3% to 5%; 2. The real interest rate falls from 3% to 2%; 3. ̄ac decreases by 1.5 percentage points; 4. ̄ag increases by 2 percentage points;
In the IS curve: y = ̄a − ̄b(r − ̄r) Suppose the parameters are ̄a = 0, ̄b = 1/2, ̄r = 2% and the interest rate is initially r = 3%. Explain what happens to the short-run output gap in each of the following scenarios (consider each separately): 1. The real interest rate rises from 3% to 5%; 2. The real interest rate falls from 3% to 2%; 3. ̄ac decreases by 1.5 percentage points; 4. ̄ag increases by 2 percentage points;
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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In the IS curve:
y = ̄a − ̄b(r − ̄r)
Suppose the parameters are ̄a = 0, ̄b = 1/2, ̄r = 2% and the interest rate is
initially r = 3%. Explain what happens to the short-run output gap in each of
the following scenarios (consider each separately):
1. The real interest rate rises from 3% to 5%;
2. The real interest rate falls from 3% to 2%;
3. ̄ac decreases by 1.5 percentage points;
4. ̄ag increases by 2 percentage points;
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