Assume that the economy is in equilibrium when the real interest ...

[AEWBW]

Assume that the economy is in equilibrium when the real interest rate rises. Explain, step-by-step, how the components of expenditure adjust to bring the economy to its new equilibrium.
 
  What will be an ideal response?

Question 2

In the steady state of Solow's exogenous growth model, an increase in total factor productivity
 
  A) increases output per worker and increases capital per worker.
  B) increases output per worker and decreases capital per worker.
  C) decreases output per worker and increases capital per worker.
  D) decreases output per worker and decreases capital per worker.

[ally]

Answer to Question 1

An increase in the real interest rate reduces consumption, investment, and net exports. Reduced expenditures cause an unplanned inventory adjustment to which firms respond by reducing output. The economy is moving to the left along the IS curve. The slope of the IS curve reflects the further output declines that occur as consumption falls in response to declining output, until the change in consumption has converged to zero (the marginal propensity to consume is less than one).

Answer to Question 2

A