Describe how the real interest rate changes in a Keynesian model if a shock shifts the IS curve down and to the right and the Fed changes its policy to keep output unchanged
What will be an ideal response?
If the Fed is going to keep output unchanged, then it will tighten monetary policy, reducing the money supply to offset the shift of the IS curve. The tighter monetary policy will mean that the real interest rate is higher. The LM curve shifts up and to the left, or the LR curve shifts up.
You might also like to view...
The reminiscences of two famous people who were born into slavery, Frederick Douglass and Booker T. Washington, include all of the following except
(a) The common custom among slave owners was to ensure that small children of slaves had the nurturing of both parents until they reached good working age. (b) Their early years were not very different from thousands of other slave children. (c) Their fathers were white men. (d) They saw their mothers infrequently, only a few times in their lives, or only sometimes in the early morning hours before their mothers went to work or late at night.
Exhibit 2-10 Production possibilities curve data A B C D E Capital goods 0 1 2 3 4 Consumption goods25 23 19 13 0 Suppose an economy is faced with the production possibilities table shown in Exhibit 2-10. As additional units of capital goods are being produced, the number of consumption goods produced must:
A. increase because the production possibility table shows only the maximum efficiency points. B. increase because of the law of increasing costs. C. decrease because of the law of increasing costs. D. decrease because of the finite nature of the resource base.