Analyzing Macroeconomic Events (Monetary Policy) with the IS Curve. Consider the following changes in the Macro economy. Show how to think about them using the IS curve graph and explain how and why GDP is affected in the short run. Treat each case separately.
a. Show the MP Curve in the IS-MP Diagram. Label axes, curves, and equilibrium points. Assume the actual output equals potential output.
b. Suppose the Federal Reserve undertakes a policy that lowers real interest rates below marginal product of capital. Show the change of the MP curve in the IS-MP diagram on the graph labeled (b). Label axes, curves, and equilibrium points.
c. In words, explains what happens to the MP Curve?
d. What happens to nominal interest rates, inflation, and real interest rates in the short-run?
e. What happens to borrowing and investment?
f. What happens to short-run output?