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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

A measure of real interest rates can be approximated by the Treasury Inflation-Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five-year TIIS (FII5) and the personal consumption expenditure price index

(PCECTPI), a measure of the price index. Choose “Quarterly” for the frequency setting for the TIIS, and choose “Percent Change From Year Ago” for the unitssetting on (PCECTPI). Plot both series on the samegraph, using data from 2007 through the most currentdata available. Use the graph to identify periods of autonomous monetary policy changes. Briefly explain your reasoning.

Assume that the monetary policy curve is given by $r = 1.5 + 0.75 π .$

a. Calculate the real interest rate when the inflation rate is $2 %, 3 %, a n d 4 % .$

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 $r = 2.5 + 0.75 π .$ 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 $2 %, 3 %, a n d 4 %,$ and draw the new MP curve, showing the shift from part (b).

Consider an economy described by the following:

C = \(4 trillion

I = \)1.5 trillion

Consider an economy described by the following:

$C = \(4 t r i l l i o n I = \) 1.5 t r i l l i o n G = \(3.0 t r i l l i o n T = \) 3.0 t r i l l i o n N X = $ 1.0 t r i l l i o n f = 0 m p c = 0.8 d = 0.35 x = 0.15 λ = 0.5 r = 2$

(a) Derive expressions for the MP curve and the AD curve.

(b) Calculate the real interest rate and aggregate output when $π = 2$ and $π = 4$

(c) Draw a graph of the MP curve and the AD curve, labeling the points given in part (b).

How is an autonomous tightening or easing of monetary policy different from a change in the real interest rate caused by a change in the current inflation rate?

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