Consider the IS curve. Suppose the parameters of the IS curve are a=0,b=3/4, and mpk=r = 2%. Suppose further that initially the real interest rate R=2%.

Note: The ideal complement to this question is to draw the diagram for the IS curve. Make sure you distinguish between movements along the curve and shifts in the position of the curve.

Suppose the real interest rate rises by 2 percentage points, from 2% to 4%. What will happen to SRO?*

A. Will increase by 1.5 percentage points.

B. Will fall by 2 percentage points.

C. Will increase by 2 percentage points.

D. Will fall by 1.5 percentage points.

Suppose the real interest rate falls by 1 percentage point, from 2% to 1%. What will happen to SRO?*

A. Will increase by 0.75 percentage points.

B. Will increase by 1 percentage points.

C. Will fall by 1 percentage points.

D. Will fall by 0.75 percentage points.

Suppose the government announces a temporary elimination of the sales tax. As a result, aC increases by 1 percentage point, from 70% to 71%. Assuming the Fed keeps interest rates constant, what will happen to SRO?*

A. Will increase by 71 percentage points.

B. Will decrease by 1 percentage point.

C. Will increase by 70 percentage points.

D. Will increase by 1 percentage point.

Suppose the government launches fiscal stimulus measures (e.g. a tax cut and an increase in government purchases). As a result, aG decreases by 2 percentage points, from 27% to 25%. Assuming the Fed keeps interest rates constant, what will happen to SRO?*

A. SRO will fall by 2 percentage points.

B. SRO will fall by 27 percentage points.

C. SRO will increase by 2 percentage points.

D. SRO will increase by 25 percentage points.

Suppose the dollar becomes weaker against the Korean currency (known as "won"). As a result, American imports from Korea fall by 2 percentage points (i.e. aIM decreases from 7% to 5%). Assuming the Fed keeps interest rates constant, what will happen to SRO?*

A. Will fall by 2 percentage points.

B. Will increase by 2 percentage points.

C. Will fall by 2.5 percentage points.

D. Will increase by 2.5 percentage points.