Homework Answers
a) Higher interest rate would decline private investment so investment spending declines. This decreases aggregate demand and shift AD to the left to reach D1
b) The new short run price level has reduced and real GDP has also reduced because AD has shifted to the left
c) In the short run it is cheaper to produce below the full employment because price level has reduced
d) Hence cost of producing below the full employment level of real GDP is decreased.
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