Suppose the parameters of the IS curve are a ¯i = 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 per- cent; what happens to the short-run equilib- rium, holding everything else constant?
(c) What happens to the short-run equilibrium if a ¯g falls 3 percent, holding everything else constant?
(d) What occurs if the marginal product of cap- ital rises to 5%? What would cause this to happen?