Question

Consider the following changes in the macro economy. Use the IS curve to analyze them and explain what would happen to it (shift of the curve, movement along the curve) and the equilibrium variables. Specifically, you should understand what will happen to GDP in the short run, and why this change occurs.

• The Federal Reserve undertakes policy actions that have the effect of lowering the real interest rate below the marginal product of capital (MPK).

ANS: JUSTIFY THE ANSWER

• Consumers become pessimistic about the state of the economy and future productivity growth.

ANS: JUSTIFY THE ANSWER

• Improvements in information technology increase productivity and therefore increase the marginal product of capital (MPK).

ANS: JUSTIFY THE ANSWER WITH EQUATION

Answer 1