In Figure 12.1, if the Federal Reserve sets the real interest rate at R+, which line represents the MP curve? (Note: In this figure, the real rate is denoted by Rt instead of rt) Figure 12.1: MP Curve R Ri MP4 MP3 MP2 * MP1 ○ MP2 ○ MP1 MP3 MP4

In Figure 12.1, if the Federal Reserve sets the real interest rate at R+, which line represents the MP curve? (Note: In this figure, the real rate is denoted by Rt instead of rt) Figure 12.1: MP Curve R Ri MP4 MP3 MP2 * MP1 ○ MP2 ○ MP1 MP3 MP4

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter27: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 14CQ

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In 2009, the U.S. economy was in a severe recession. The Federal Reserve had lowered the federal funds rate to about 0 percent, but still wanted to stimulate the economy more. The inflation rate in 2009 was about –1%, but households’ and businesses’ inflation expectations for the upcoming year were higher and positive, about 1.5%. a)First, do households’ and businesses’ investment demand depend on the ex ante or ex post real interest rate? Briefly explain why. b)Draw an IS-MP diagram that’s consistent with the state of the U.S. economy in 2009. Make sure that your IS and MP curves intersect in a place that is consistent with the setup of the problem, above. In particular, do your IS and MP curves intersect on the flat part of the MP curve, or the upward-sloping part? And do your IS and MP curves intersect at a positive real interest rate or a negative real interest rate? c)Suppose that the U.S. Congress and President pass a fiscal stimulus package that increases government spending.…
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