Suppose a negative aggregate demand shock causes short-run output to drop to -1%.

Suppose a negative aggregate demand shock causes short-run output to drop to -1%. To stimulate investment and bring the economy back to potential output the interest rate decreases by 1 percentage point. However, as a result investment increases more than expected and short-run output reaches 1%. This result could be caused by:

  1. An increase in the consumption share of potential output
  2. An increase in the government purchases share of potential output
  3. A decrease in the import share of potential output
  4. The presence of a consumption multiplier
  5. All of these are correct
 
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