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Question
1. ???The monetary policy (MP) curve has income, Y on the horizontal axis and real interest rate r on the vertical axis. Explain what the MP curve shows. What determines its slope? What determines movement along the MP curve? ( Dont show this mathematically).
2. ???Assume the government wants to increase Y, without increasing r. Using the IS-MP model show how the govemment can achleve this goal.
3. Assume the MP curve is given by r = 1.0 + 0.5π, where r Is the inflation rate. The IS curve is given by Y = 14 - r. Derive the equation of the aggregate demand curve. What does the aggregate demand curve look like?If inflation is 10% what is the level of output?
4. What potential problems may cause policy makers to worry about using the IS-MP model.
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