Question: Your day as chair of the Fed (II). With the goal of stabilizing output, explain how and why you would change the interest rate in response to the following shocks. Show the effects on the economy in the short run using the IS-MP diagram.
(a) Consumers become pessimistic about the state of the economy and future productivity growth.
(b) Improvements in information technology increase productivity and therefore increase the marginal product of capital.
(c) A booming economy in Europe this year leads to an unexpected increase in the demand by European consumers for U.S. goods.
(d) Americans develop an infatuation with all things made in New Zealand and sharply increase their imports from that country.
(e) A large earthquake destroys many houses and buildings on the West Coast, but fortunately results in little loss of life.
(f) A housing bubble bursts, so that housing prices fall by 20% and new home sales drop sharply.