Question

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).

Short answer

A.

B.

C. As the increased affectedness rate also added the real claim class caused the fiscal course arc move above thereby aiding the frugality to catch and affectedness to slip.

D. The graph below shows the Derivation of MP curve with new given monetary policy curve. Where axis represents increasing real charge per unit and Y represents increasing rate. The upward slope of the MP curve shows the reaction of the financial organization to a higher rate by increasing the important interest rates.

Step-by-step solution

Concept Preface 

Preface Affectation rate refers to the rate at which prices of the frugality rises over time performing in a fall in the purchasing power. It's being calculated using the rise in the price of a defined handbasket of product. The central bank always attempts to confine affectation and maintain a strategic distance from deflation in order to keep the frugality balanced.
The real claim class is the class of claim an investor, saver or lender receives in the wake of holding into account affectedness. It can be delineated again formally by the Fisher equation, which expresses that the real claim rate is about the formal interest rate minus the affectedness class.

Explanation of Solution

A.

Contributed pocket course arc as $r=1.5+0.75\pi$

Where,

- $r$is the authentic claim class

- $\pi$is affectedness class.

When $\pi$is 2 :

role="math" localid="1647468699606" $$\begin{gathered} r=1.5+0.75\left(2\right) \\ =1.5+1.5 \\ =3.0\% \end{gathered}$$

When $\pi$is 3 :

role="math" localid="1647469665558" $$\begin{gathered} r=1.5+0.75\left(3\right) \\ =1.5+2.25 \\ =3.75\% \end{gathered}$$

When $\pi$is 4 :

$$\begin{gathered} r=1.5+0.75\left(4\right) \\ =1.5+3.0 \\ =4.5\% \end{gathered}$$

:Explanation of Result 

B. Derivative of MP arc with given affectedness point is shown in the number below,

In the said graph,$X$a block represents authentic claim class and $Y$block represents affectedness class. The upward grade of the MP arc shows the answer of the halfway bank to the developed affectedness class by adding the real claim classes.

Explanation of Result 

C. The new financial course arc$r=2.50.75\pi$ shows a self-governed tight of the fiscal course to lower the affectedness class.
As the increased affectedness rate also added the real claim class caused the fiscal course arc to move above thereby aiding the frugality to catch and affectedness to slip.

Explanation of Result 

D.

Contributed pocket course arc as $r=1.5+0.75\pi$

Where,

- $r$is the authentic claim class

- $\pi$is affectedness class.

When $\pi$is 2 ,

$$\begin{gathered} r=1.5+0.75\left(2\right) \\ =1.5+1.5 \\ =3.0\% \end{gathered}$$

When $\pi$is 3 ,

$$\begin{gathered} r=1.5+0.75\left(3\right) \\ =1.5+2.25 \\ =3.75\% \end{gathered}$$

When $\pi$is 4 ,

$$\begin{gathered} r=1.5+0.75\left(4\right) \\ =1.5+3.0 \\ =4.5\% \end{gathered}$$

The graph under shows the derivative of MP arc with the new given fiscal course arc. Where block represents adding authentic claim class and $y$represents adding affectedness class. The upward grade of the MP arc shows the answer of the intermediary bank to forward affectedness class by adding the authentic claim classes.