Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
18.3 Equilibrium in the IS-MP Model
Learning objective: Use the IS-MP model to illustrate macroeconomic equilibrium.
Review Questions
3.1 The first graph that follows shows that in long-run equilibrium, the IS and MP curves intersect
3.2 When the Fed lowers the real interest rate, the MP curve shifts down. The IS curve and the output
3.3 The default risk premium is the additional yield that an investor requires for holding a bond
with some default risk. The default risk premium dramatically increased during the 2007-2009
Problems and Applications
3.4 The large positive demand shock shifts the IS curve to the right, from IS1 to IS2, increasing the
output gap as real GDP increases relative to potential GDP. The increase in the output gap
3.5 During the Great Depression the economies of the United States and the United Kingdom were far
below potential GDP and unemployment was very high. In those circumstances, even very large
3.6 In conducting monetary policy, the Federal Reserve since the early 1980s has targeted the
3.7 Having to rely on “real-time data” that is subject to revisions strengthens the argument against
fine-tuning the economy with activist stabilization policy. With data inaccuracies, fine-tuning
could lead to wrong policies. For example, the Federal Reserve might begin an expansionary
3.8 a. In the top graph that follows, equilibrium initially occurs where the MP1 curve intersects the IS
b. The Fed should reduce its target for the federal funds rate, lowering the real interest rate
c. As the inflation rate persists at 2%, the expected inflation rate will increase from 2% to
3.9 a. Tax increases and government spending reductions would shift the IS curve to the left,
b. An increase in uncertainty about taxing and government spending would decrease both
18.4 Are Interest Rates All That Matter for Monetary Policy
Learning Objective: Discuss alternative channels for monetary policy.
Review Questions
4.2 Yes, through the banking lending channel. In the bank lending channel, monetary policy affects
Problems and Applications
4.3 The bank lending channel and the balance sheet channel reinforce the interest rate channel. For
4.4 A monetary expansion increases banks’ ability to lend, and increases in loans to bank-dependent
4.5 You would expect the banking lending channel to have a larger effect in emerging economies.
4.6 As our financial system expands and develops additional sources of financing for small- to
Data Exercises
D18.1
a. The relationship between the federal funds rate and long-term nominal interest rates is
b. Although all three rates tend to move together, the relationship between the federal funds
rate and the 30-year fixed mortgage rate is weaker than the relationship between the federal
D18.2 a.
c. To offset the effect of a rise in the default-risk premium during recessions, the Fed could
b.
c. The real interest rate on Aaa corporate bonds went from 3.18% in December 2007 to 3.43%
d. The real interest on Aaa corporate bonds went from 3.81% in September 2009 to 5.48% in
D18.4 a. For the 1966–1969 period, the economy moved up the short-run Phillips curve with the
inflation rate rising and the unemployment rate declining.
Year Unemployment Rate Inflation Rate
