Suppose the demand curve is Y = 38 - 3, and the current values ...

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Suppose the demand curve is Y = 38 - 3, and the current values for output and the real interest rate are 29 and 7 percent, respectively. A decrease in inflation leads to a new output level of 32 and real interest rate at 6 percent.
 
  The monetary policy curve is ________. Fill in the blank(s) with correct word

Question 2

In an open economy, an increase in saving might not cause an increase in domestic investment. Why not? Does that mean that an increase in saving is undesirable?
 
  What will be an ideal response?

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Answer to Question 1

The inflation rate falls from 3 percent to 2 percent. The corresponding real interest rates are 7 percent and 6 percent, so the MP curve is r = 4 + .

Answer to Question 2

An increase in saving can affect the domestic real interest rate only by changing the world interest rate. If the world interest rate does not change, domestic investment is not affected. More saving means less consumption, which reduces both imports and domestic demand for domestic output, so exports (and net exports) rise. The increase in saving must correspond to investment somewhere, but not necessarily in the economy where the saving originates. Nonetheless, wealth rises for those who accomplish the higher saving.