"Consider the IS-MP model. Initially, there are no AD shocks and the Fed sets the (real) interest rate at R=4 percent. Graph the initial equilibrium and label it point A. Suppose now that consumers become pessimistic about the state of the economy and anticipate an imminent increase in unemployment rates. The Fed keeps its monetary policy unchanged. Shift the necessary curves in the IS-MP diagram and label the new equilibrium as point B. How will SRO be affected?" None of the other options "MP will shift down. Investment, actual GDP and SRO will all increase." "The IS will shift to the right. As a result, SRO will fall." "The IS will shift to the left. As a result, actual GDP will fall but SRO will remain unchanged."

"Consider the IS-MP model. Initially, there are no AD shocks and the Fed sets the (real) interest rate at R=4 percent. Graph the initial equilibrium and label it point A. Suppose now that consumers become pessimistic about the state of the economy and anticipate an imminent increase in unemployment rates. The Fed keeps its monetary policy unchanged. Shift the necessary curves in the IS-MP diagram and label the new equilibrium as point B. How will SRO be affected?" None of the other options "MP will shift down. Investment, actual GDP and SRO will all increase." "The IS will shift to the right. As a result, SRO will fall." "The IS will shift to the left. As a result, actual GDP will fall but SRO will remain unchanged."

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter24: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section24.3: Using Policy To Stabilize The Economy

Problem 3QQ

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