Question $3$

Select the correct answers and illustrate your solution in the diagram

The figure shows equilibrium in the goods market, with the curve $\backslash ($ Z Z $\backslash )$ showing the demand for goods. Because the demand curve is drawn flatter than the $45-$degree line, we know that the response of demand to a change in output is than one$-$for$-$one.

$($a$)$ less

$($b$)$ more

Suppose an increase in the interest rate. Draw the new demand for goods and label your curve $\backslash ($ Z Z$^\{\backslash$prime$\}\backslash ).$ As a result of the change in the interest rate, the economy's equilibrium output is now

$($a$)$ higher

$($b$)$ lower