Author Question: When the inflation rate falls, what happens, and why, to the MP, IS, and AD curves? What will be ... (Read 41 times)

natalie2426 · **on:** Jun 30, 2018

When the inflation rate falls, what happens, and why, to the MP, IS, and AD curves?

What will be an ideal response?

Question 2

Savings in our model are

A) durable consumption.
B) non-durable consumption.
C) postponed consumption.
D) money.

xthemafja · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A decrease in the inflation rate will, typically, raise the real interest rate, given the nominal interest rate, because expected inflation will have fallen. To prevent this increase in the real interest rate, which would cause spending and output to decline, the central bank lowers the nominal interest rate by more than the decrease in expected inflation. This movement down to the left along the MP curve corresponds to movement down to the right along the IS curve, because the lower real interest rate increases consumption, investment, and net exports. Movement down to the right along the AD curve shows the increase in output that has resulted from the decrease in the inflation rate.

Answer to Question 2

C