Chapter 18 - IS-MP Analysis
how does interest rate affect investment in the economy
Lower interest rates lower the cost of borrowing for firms, and so investment rises
Which of the following shows the correct effect on the IS-MP framework if there is a credit crunch the economy, meaning banks are unwilling to lend except at high interest rates?
MP curve moves up
The IS curve is constructed by
adding up the level of aggregate expenditure at each real interest rate.
Finding the multiplier
change in GDP/ Change in G spending
planned investment is
expenditure on capital goods by businesses.
MP (monetary policy) curve
illustrates the current real interest rate
A good proxy for the risk-free interest rate is the interest rate on a:
loan to the US government
the higher the opportunity cost of consumption
the lower the aggregate expenditures
In September 2008, the stock market fell sharply and continued to perform poorly due to the financial crisis. How did this change impact GDP in the economy?
IS curve moves left
Which of the following shows the correct effect on the IS-MP framework if there is a rise in home values and wealth in the economy?
IS curve shift right
What can cause the IS curve to shift
Spending shocks occur
What can cause the MP curve to shift
changes in monetary policies Financial Shocks
If the US government lowers the personal income tax rates
disposable income increase, and this leads to an increase in consumption and a right shift of the IS curve
the risk premium is
extra interest charged by lenders to account for risk
IS (investment savings) curve
illustrates the relationship between real interest rates and the output gap
The intersection of the IS and MP curve means
macroeconomic equilibrium
Positive output gap
potential < actual
Negative output gap
potential >actual
If government expenditure rises by $27.5 billion and the multiplier in the economy is 2.5, then:
real GDP rises by $68.75 billion, and the IS curve shifts to the right.
what could make a positive output gap
the US dollar depreciates trading partners reduce tariffs of US exports Monetary policy actions boost the economy
Aggregate Expenditure
the total amount of goods and services that people want to buy across the whole economy
If actual GDP is greater than potential GDP
the economy experiences inflation
AE =
C + I + G + NX