In the figure above, assume that output is $10.5 trillion, while potential output is $12 trillion. If there is no policy intervention, we should expect ________. A) rightward shifts of IS & AD, so that both output and inflation rise B) a decrease in inflation to shift the MP curve, raising the real interest rate C) declines in both the inflation rate and the real interest rate as output rises D) a decrease in inflation to shift the AD curve, causing output to rise E) none of the above Real InterestRate, r(percent)2.52.01.5Real InterestRate, r(percent)221505InflationRate,(percent)3.02.01.01.0 2.0 3.0 Inflation Rate,(percent)9.5 10.0 10.5MP9.5 10.0 10.512.0 12.5 13.0Aggregate Output, Y($ trillions)15₂12.0 12.513.0Aggregate Output, Y($ trillions)ADAD₁

Inflation is general rise of price level over time.IS shows goods and services market equilibrium.…

Answered: In the figure above, assume that output…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In the figure above, assume that output is $10.5 trillion, while potential output is $12 trillion. If there is no policy intervention, we should expect ________.
A) rightward shifts of IS & AD, so that both output and inflation rise
B) a decrease in inflation to shift the MP curve, raising the real interest rate C) declines in both the inflation rate and the real interest rate as output rises
D) a decrease in inflation to shift the AD curve, causing output to rise
E) none of the above

Real Interest
Rate, r
(percent)
2.5
2.0
1.5
Real Interest
Rate, r
(percent)
221
505
Inflation
Rate,
(percent)
3.0
2.0
1.0
1.0 2.0 3.0 Inflation Rate,
(percent)
9.5 10.0 10.5
MP
9.5 10.0 10.5
12.0 12.5 13.0
Aggregate Output, Y
($ trillions)
15₂
12.0 12.513.0
Aggregate Output, Y
($ trillions)
AD
AD₁

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