Using the information in the diagram evaluate the following statements: I. The I
ID: 1173856 • Letter: U
Question
Using the information in the diagram evaluate the following statements:
I. The IS curve in the diagram above shifted out and to the right most likely because the inflation rate increased.
II. The shift out and to the right of the IS curve creates a positive output gap at a real interest rate of 3%.
III. The output gap produced by the shift in the IS curve most likely will make the inflation rate fall below target and the unemployment rate rise above target.
IV. The Fed's policy makers can move closer to fulfilling their dual mandate by adopting a high interest rate policy and raising the real interest rate to 5% from 3%.
V. The shift out and to the right of the IS curve lowered the natural interest rate from 7% to 5%.
Which of the following answers is correct?
Only statements II, III, and IV are true.
Only statements II and III are true.
Only statements II, IV, and V are true.
Only statements I, II, and III are true.
Only statements II and IV are true.
A.Only statements II, III, and IV are true.
B.Only statements II and III are true.
C.Only statements II, IV, and V are true.
D.Only statements I, II, and III are true.
E.Only statements II and IV are true.
Explanation / Answer
Changes in Y and i lead to shift in LM curve and not IS curve. That leads to output gap which increases inflation. The interest rates rises with outward shift in IS curve.
STATEMENT II and III hold true.
OPTION B
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