2. The Standard IS Curve Suppose that the initial parameters of the IS curve are a...

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2. The Standard IS Curve Suppose that the initial parameters of the IS curve are a = 0,5 = ,7 = 0.02 and the real interest rate is Ro = 0.02 initially. Explain what happens to short-run output in each of the following scenarios (consider each separately). You should be able to determine the percentage change in short-run output in each case. A. B. C. The Fed raises the real interest rate from 2 percent (R = 0.02) to 4 percent (R = 0.04) Suppose a decreases by 1 percentage point and the Federal Reserve holds the real interest rate constant. Let's consider the case in Part A again, where the Fed raises the real interest rate from 2 percent to 4 percent. In this case, however, suppose that 5 = 0. What happens to the output gap in this case? Why is it different from what you computed in Part A? 2. The Standard IS Curve Suppose that the initial parameters of the IS curve are a = 0,5 = ,7 = 0.02 and the real interest rate is Ro = 0.02 initially. Explain what happens to short-run output in each of the following scenarios (consider each separately). You should be able to determine the percentage change in short-run output in each case. A. B. C. The Fed raises the real interest rate from 2 percent (R = 0.02) to 4 percent (R = 0.04) Suppose a decreases by 1 percentage point and the Federal Reserve holds the real interest rate constant. Let's consider the case in Part A again, where the Fed raises the real interest rate from 2 percent to 4 percent. In this case, however, suppose that 5 = 0. What happens to the output gap in this case? Why is it different from what you computed in Part A?

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The Standard IS Curve and Output Gap Heres an explanation of the scenarios you described focusing on the shortrun output gap Initial Parameters a 002 ... View the full answer