The IS-MP Model

The IS curve shows the combinations of the real interest rate and the aggregate output that represent equilibrium in the market for goods and services. The MP curve represents Federal Reserve monetary policy. For each of the following, evaluate how the IS curve and MP curve might be affected (if at all):

A decrease in financial frictions.
An autonomous easing of monetary policy.
An increase in the current inflation rate.
Firms become more optimistic about the future of the economy.
The new Federal Reserve chair begins to care more about fighting inflation.

Leave a Reply

Your email address will not be published. Required fields are marked *