Article : Lukkezen, Kool and Jacobs (2016)Lukkezen, Kool and Jacobs (2016) - The IS/MP-AS/AD model
3 important questions on Article : Lukkezen, Kool and Jacobs (2016)Lukkezen, Kool and Jacobs (2016) - The IS/MP-AS/AD model
Decribe the MP curve
The MP-curve (‘monetary policy’) gives all combinations of real interest rates r and incomes Y at which the money market is in equilibrium
Why is MP upward sloping
To see why the MP curve has an upward slope, we need to recognize that central banks seek to keep inflation stable. To stabilize inflation, monetary policymakers follow the Taylor principle, named after John Taylor of Stanford University, in which they raise nominal rates by more than any rise in expected inflation so that real interest rates rise when there is a rise in inflation, as the MP curve suggests
Explain the downward sloping of the ad curve
Higher inflation is thus associated with lower output, which results in a downward-sloping AD-curve,
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