When the inflation rate falls, what happens, and why, to the MP, IS, and AD curves?
What will be an ideal response?
A decrease in the inflation rate will, typically, raise the real interest rate, given the nominal interest rate, because expected inflation will have fallen. To prevent this increase in the real interest rate, which would cause spending and output to decline, the central bank lowers the nominal interest rate by more than the decrease in expected inflation. This movement down to the left along the MP curve corresponds to movement down to the right along the IS curve, because the lower real interest rate increases consumption, investment, and net exports. Movement down to the right along the AD curve shows the increase in output that has resulted from the decrease in the inflation rate.
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The aggregate demand curve has a negative slope, because households and businesses respond to an increase in ________ by reducing their expenditures
A) the inflation rate B) output C) the real interest rate D) all of the above E) none of the above
Which of the following might be considered a positive externality?
A) the pollination of an orange grove due to bees kept by a nearby beekeeper B) individuals who did not get the flu, yet did not receive a flu shot when those around them did receive the shot C) better fishing resulting from increased lake temperatures generated by the nearby power plant D) All of the above are correct.
Which of the following is NOT a restriction the government imposes to keep potential entrants out of a market?
A) patents B) tariffs C) assistance with opening new firms D) copyrights
Amusement Park / Cola Tie-in The Six Flags Over Texas amusement part in the middle of the Dallas-Fort Worth Metroplex has a tie-in marketing campaign with Coca-Cola during the summer. In local grocery stores, some Coke cans offer $5 off admission to the park. Why does Six Flags limit these cans so that none are sold further than 20 miles from the park?