Using the information in the diagram evaluate the following statements: I. The m

Question

Using the information in the diagram evaluate the following statements:

I. The most likely reason the IS curve in the diagram shifted in and to the left was because demand decreased.

II. The shift in and to the left of the IS curve creates a negative output gap at a real interest rate of 3%.

III. The output gap produced by the shift in the IS curve will reduce inflationary pressures and increase unemployment.

IV. The Fed's policy makers can move closer to fulfilling their dual mandate by keeping the real interest rate constant at 3%.

V. The shift in and to the left of the IS curve raises the natural interest rate from 3% to 5%.

Which of the following answers is correct?

Only statements II, IV, and V are true.

Only statements II, III, and IV are true.

Only statements I, II, and III are true.

Only statements II and IV are true.

Only statements II and III are true.

A.

Only statements II, IV, and V are true.

B.

Only statements II, III, and IV are true.

C.

Only statements I, II, and III are true.

D.

Only statements II and IV are true.

E.

Only statements II and III are true.

The Interest Rate (Nominal and in Parentheses the Real Rate) Full-Employment Output 7% (5%) 5% (3%) IS Curve Before 3% (1%) Recession Is Curve After a ?Mild Recession $14.5 $15 Output in Trillions of Real Dollars

Explanation / Answer

C us right. Ist, 2nd and 3rd statements are right.e.g depression shifts Aggregate demand leftwards and thus is curve will fall leftwards

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