What does the MP curve represent?
The relationship between inflation and the real interest rate set by monetary policy.
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| Term | Definition |
|---|---|
| What does the MP curve represent? | The relationship between inflation and the real interest rate set by monetary policy. |
| Why does the MP curve slope upward? | Because central banks raise real interest rates when inflation increases. |
| What is the Taylor principle? | The idea that central banks raise nominal rates more than one-for-one with inflation. |
| What is an autonomous tightening of monetary policy? | A rise in real interest rates at a given inflation level. |
| What is an autonomous easing of monetary policy? | A reduction in real rates at a given inflation level. |
| What causes shifts in the MP curve? | Autonomous changes in monetary policy stance. |
| What does movement along the MP curve represent? | A change in inflation leading to a policy rate adjustment. |
| What does a shift in the MP curve represent? | A policy decision independent of inflation changes. |
| What happens when the central bank raises rates? | The MP curve shifts up or there is movement along it. |
| What happens when the central bank cuts rates? | The MP curve shifts down or there is movement along it. |
| What is the aggregate demand (AD) curve? | It shows the relationship between inflation and equilibrium output. |
| Why does the AD curve slope downward? | Because higher inflation leads to higher real interest rates and lower output. |
| What shifts the AD curve right? | Increases in government spending or decreases in taxes. |
| What shifts the AD curve left? | Tighter monetary policy or reduced spending. |
| How does an easing of monetary policy affect AD? | It shifts AD to the right. |
| How does a tightening of monetary policy affect AD? | It shifts AD to the left. |
| What causes AD to shift similarly to the IS curve? | Because both depend on the same spending factors. |
| What happens when financial frictions decline? | AD shifts right due to increased investment. |
| What happens when consumer optimism rises? | AD shifts right. |
| What happens when inflation expectations fall? | The central bank may ease policy, shifting AD right |
| What is the short-run impact of monetary easing? | Lower real rates and higher output. |
| What is the long-run impact of excessive easing? | Higher inflation without output gains. |
| What is the Federal Reserve’s main policy tool? | The federal funds rate. |
| What is the difference between nominal and real interest rate? | Real = nominal - expected inflation. |
| How does inflation affect real interest rates? | Higher inflation reduces real rates if nominal rates don’t adjust enough. |
| What is autonomous monetary easing? | A central bank’s deliberate decision to lower rates independent of inflation. |
| What is an example of autonomous easing? | During the Global Financial Crisis or COVID-19 crisis. |
| What happens when the Fed follows the Taylor principle? | It stabilizes inflation expectations. |
| What happens if the Fed ignores the Taylor principle? | Inflation can spiral upward. |
| What is the link between MP and AD curves? | MP affects AD by influencing real interest rates and spending. |
| What happens when AD increases? | Output and inflation rise in the short run. |
| What happens when AD decreases? | Output and inflation fall in the short run. |
| What does an upward shift in MP curve mean? | A tightening of monetary policy. |
| What does a downward shift in MP curve mean? | An easing of monetary policy. |
| What does the slope of AD curve reflect? | The sensitivity of spending to interest rate changes. |
| What happens when taxes decrease? | AD shifts right due to higher consumption. |
| What happens when government spending increases? | AD shifts right. |
| What happens when exports increase? | AD shifts right. |
| What happens when monetary policy tightens? | AD shifts left. |
| What happens when inflation rises unexpectedly? | The central bank raises rates, reducing output. |
| What is the purpose of the MP curve? | To link monetary policy decisions with inflation outcomes. |
| What does the AD curve show graphically? | The inverse relationship between inflation and equilibrium output. |
| How does an expansionary fiscal policy affect AD? | Shifts AD to the right. |
| How does a contractionary fiscal policy affect AD? | Shifts AD to the left. |
| What is the policy implication of the AD curve? | Stabilizing inflation requires adjusting demand via monetary policy. |