Log out Go to App
Go to App

Learning Materials

Features

Discover

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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Consider an economy described by the following:

C = \(4 trillion

I = \)1.5 trillion

A measure of real interest rates can be approximatedby 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 of the TIIS,and download both data series. Convert the priceindex data to annualized inflation rates by taking thequarter-to-quarter percent change in the price indexand multiplying it by 4. Be sure to multiply by 100so that your results are percentages.

a. Calculate the average inflation rate andthe average real interest rate over the most

recent four quarters of data available and the four quarters prior to that.

b. Calculate the change in the average inflation rate between the most recent annual

period and the year prior. Then calculate the change in the average real interest rate

over the same period.

c. Using your answers to part (b), compute the ratio of the change in the average real interest

rate to the change in the average inflation rate. What does this ratio represent? Comment on

how it relates to the Taylor principle

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 of the TIIS, and download both data series. Convert the price index data to annualized inflation rates by taking the quarter-to-quarter percent change in the price index and multiplying it by 4. Be sure to multiply by 100 so that your results are percentages.

a. Calculate the average inflation rate and the average real interest rate over the most recent four quarters of data available and the four quarters prior to that.

b. Calculate the change in the average inflation rate between the most recent annual period and the year prior. Then calculate the change in the average real interest rate over the same period.

c. Using your answers to part (b), compute the ratio of the change in the average real interest rate to the change in the average inflation rate. What does this ratio represent? Comment on how it relates to the Taylor principle.

When the inflation rate increases, what happens to the federal funds rate? Operationally, how does the Fed adjust the federal funds rate?

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

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free