Q. 13 For each of the following situat... [FREE SOLUTION]

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Chapter 22: Q. 13 (page 582)

For each of the following situations, describe how (if at all) the IS, MP, and AD curves are affected.
a. A decrease in financial frictions
b. An increase in taxes and an autonomous easing of monetary policy
c. An increase in the current inflation rate
d. A decrease in autonomous consumption
e. Firms become more optimistic about the future of the economy.
f. The new Federal Reserve chair begins to care more about fighting inflation.

Short Answer

Expert verified

a. IS curve moves to the right, MP curves remain the same

b. IS curve remains the same, MP curve moves to left,

c. IS and MP shift to the left, Ad moves right

d. IS shifts to the left, MP unaffected, AD moves left

e. IS moves to right, MP unaffected, AD moves right

f. IS moves left, MP moves right, AD moves left

Step by step solution

Step :1 Introduction

The investment saving curve or IS curve shows the different combinations of income and interest rate at which the market for goods is at equilibrium. MP curve shows the different combinations of inflation and interest rate at which the money market is in equilibrium.

Step :2 Decrease in financial frictions (part a)

a) Minimizing economic motion causes the IS curve to shift to the right, the MP curve to remain unchanged, and the AD curve to demographic shift.

Step :3 Increase in taxes and an autonomous (part b)

b) The surtax induces the Equilibrium point to shift to the left, while the IS curve stays the same and the MP curve shifts to the left.

Step :4 The current inflation rate (part c)

As the present inflation rate rises, the MP and IS curves shift to the left, while the AD curve shifts to the right.

Step : 5 Decrease in autonomous consumption (part d )

d) Reducing autonomous consumption causes the AD and IS slopes to shift to the left, but has no consequence on the MP curve.

Step :6 future of the economy (part e)

e) Beneficial firm behavior symbolizes the resurgence of so-called animal spirits, which will cause the AD and IS curves to shift to the right, but the MP curve has no effect.

Step : 7 fighting inflation (part f)

f) Anxiety about inflation is seen as an independent tightening of monetary policy, resulting in a movement to the left of the IS and AD curves and a rightward shift of the MP curve.

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