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Chapter 22: Q.5 (page 581)

How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve?

Short Answer

Expert verified

With the choice of Fed to boost the important charge per unit at the given rate of inflation, the autonomous monetary policy tightening occurs. Thus, there'll be shifts in MP curve upward. Whereas, with the choice of Fed to lower the rate of interest at the given rate, the autonomous monetary policy easing occurs. Thus, there'll be shifts in MP curve downward.

Step by step solution

01

Concept

An increase in the general price level of the economy is referred to as inflation. It causes the loss in the purchasing power of the money held by the public.

02

Explanation of solution 

An autonomous contraction in the monetary policy would cause the MP curve to move upwards, as the real interest rate would increase. An autonomous easing in the monetary policy would cause the MP curve to move downwards, as the real interest rate would decline.

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Most popular questions from this chapter

Suppose the monetary policy curve is given by r=1.5+0.75蟺, and the IS curve is given by Y=13-r.

a. Calculate an expression for the aggregate demand curve.

b. Calculate the real interest rate and aggregate output when the inflation rate is 2%, 3%, and 4%.

c. Draw graphs of the IS, MP, and AD curves, labeling the points from part (b) on the appropriate graphs.

Suppose that government spending is increased at the same time that an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?

Assume that the monetary policy curve is given by

r = 1.5 + 0.75p.

a. Calculate the real interest rate when the inflation rate

is 2%, 3%, and 4%.

b. Draw a graph of the MP curve, labeling the points

from part (a).

c. Assume now that the monetary policy curve is given

by r = 2.5 + 0.75p. Does the new monetary policy

curve represent an autonomous tightening or loosening

of monetary policy?

d. Calculate the real interest rate when the inflation rate

is 2%, 3%, and 4%, and draw the new MP curve,

showing the shift from part (b).

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.

Use an IS curve and an MP curve to derive graphically the AD curve.
See all solutions

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