Use the AD AS model to predict the impact on the economy from the following scen

Question

Use the AD AS model to predict the impact on the economy from the following scenario: The real interest rate decreases. What is the short run (sloping AS) effect? a. The curve will shift (AD or AS) b. The curve will shift (left or right) c. The new equilibrium price level (GDP Deflator Index) will be (higher or lower) d. The new equilibrium real GDP will be (higher or lower). e. The unemployment rate will be (higher or lower Use the AD AS model to predict the impact on the economy from the following scenario: The real interest rate decreases. What is the short run (sloping AS) effect? a. The curve will shift (AD or AS) b. The curve will shift (left or right) c. The new equilibrium price level (GDP Deflator Index) will be (higher or lower) d. The new equilibrium real GDP will be (higher or lower). e. The unemployment rate will be (higher or lower Use the AD AS model to predict the impact on the economy from the following scenario: The real interest rate decreases. What is the short run (sloping AS) effect? a. The curve will shift (AD or AS) b. The curve will shift (left or right) c. The new equilibrium price level (GDP Deflator Index) will be (higher or lower) d. The new equilibrium real GDP will be (higher or lower). e. The unemployment rate will be (higher or lower

Explanation / Answer

Lower interest rate will increase investment demand, increasing aggregate demand, therefore:

(a) AD curve will shift, and AS will remain unchanged in short run.

(b) AD curve will shift to right.

(c) Rightward shift of AD curve will increase price level, so FDP Deflator index will be higher.

(d) Real GDP will be higher. As a result,

(e) Unemployment rate will be lower.

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