Suppose the parameters of the IS curve are ¯a = 0, ¯b = 0.5, ¯r = 3% and the real interest rate is initially R = 3%. (a) Is the economy in its long-term equilibrium? Explain. (b) Suppose the real interest rate falls to 2 percent; what happens to the short-run equilibrium, holding everything else constant? (c) What happens to the short-run equilibrium if ¯ag falls 3 percent, holding everything else constant? (d) What occurs if the marginal product of capital rises to 5 percent, holding everything else constant? What would cause this to happen?

Part a)

Since the underlying genuine financing cost is 3% and the harmony loan fee is additionally 3%, the economy must be in Long run Equilibrium.

Part b)

At the point when genuine financing cost tumbles to 2%, at that point it falls beneath the since a long time ago run degree of harmony, there is a descending development along the bend and consequently yield is expanded. There is a positive gap.

Part c)

On the off chance that administration spending falls, it causes an upward development along the bend and subsequently yield is diminished. There is a negative gap.

Part d)

On the off chance that MPK ascends to 5%, at that point speculation spending is expanded This brings a descending development along the bend and henceforth yield is expanded. There is an irritation hole

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a

explanation: