Nominal interest rate unchanged

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Using the IS-MP diagram, explain what happens to the economy if there is a temporary consumption boom that lasts for one period.

a) Initially, suppose the FED keeps nominal interest rate unchanged.

b) Now suppose you were the chairman of the FED. What action would you take and why? (Refer to the IS-MP diagram)

Now consider the full short-run model (that is, include the Phillips curve and allow the economy to evolve over time). Redo parts (a) and (b) above. Be sure to provide graphs for output and inflation over time

Reference no: EM13975087

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