"Suppose the parameters of the IS curve are a=0, b=3/4, and the MPK is r = 2%. Suppose also that initially the Fed sets the (real) interest rate equal to the MPK. Draw the IS-MP diagram and label the initial equilibrium as point A. Now suppose the government adopts fiscal austerity measures and cuts its spending. As a result, aG falls by 5 percentage points, from 27% to 22% of GDP. Shift the necessary curves in the IS-MP diagram and label the new equilibrium as point B. How will SRO be affected?" It will fall by 5 percentage points It will fall by 3 percentage points It will increase by 4 percentage points None of the other options

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