In: Economics
1. Describe, in your own words, the MP curve. What does the slope of the MP curve tell you?
2. At equilibrium (i.e., no aggregate demand shocks, and short-run output Y˜ = 0), what level does the MP curve stay at? Why?
3. Assume that the Central Bank decides to raise interest rates.
(a) Which rate does the Central Bank actually raise - the nominal or the real?
(b) Explain why the MP curve shifts. Why is the assumption of sticky prices important?
(c) Consider the IS and MP curves together. How does the Central Bank’s change in the interest rate impact short-run output Y˜ ?