The following graph depicts an IS curve for the economy.

a. How does the output gap change if the real interest rate rises from 1% to 3%?

b. Explain the process by which the output gap changed. How did the change in the real interest rate affect aggregate expenditure?

c. How do actual output and potential output change?

Transcribed Image Text:

Real interest rate 5% 3% 1% -10% -5% IS curve 0% Output gap