If your goal is to stabilize output, explain how you would change the interest rate in response to the following events (or shocks). In each case, 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 technology increase the marginal product of capital.
c) A booming economy in Europe this year increases demand for US goods.
d) A housing bubble bursts. Housing prices decline by 20 percent, and new homes sales drop sharply.