IS-MP-PC Flashcards

1
Q

what is the fed model?

A

the fed model is a framework that uses the IS curve, the MP curve, and the Philips curve to link interest rates, the output gap, and inflation

policy makers and professional economists use the model to analyze, forecast, and tweak the economy

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2
Q

what are we able to forecast using the fed model?

A

interest rates, output gap, and inflation

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3
Q

how do we forecast economic outcomes?

A

first use the IS-MP framework to determine the output gap

next, use the Philips curve to assess inflation

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4
Q

how do you use to fed model to forecast inflation?

A

IS-MP curve
1) find eqm point between IS and MP
2) find real interest rate
3) then find output gap

Philips curve
4) find the point on the philips curve with the same output gap
5) find unexpected inflation
6) calculate actual inflation = unexpected + expected

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5
Q

what are the three types of macroeconomic shocks?

A

1) financial
2) spending
3) supply

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6
Q

what curve do financial shocks shift?

A

MP curve

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7
Q

what curve do spending shocks shift?

A

IS curve

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8
Q

what curve do supply shocks shift?

A

philips curve

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9
Q

what does the IS-MP framework determine?

A

output gap

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10
Q

what does the PC determine?

A

inflation

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11
Q

what are the steps for analyzing macroeconomic shocks?

A
  1. identify the shock, and shift the curve
  2. find the output gap
  3. assess inflation
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12
Q

how does the MP curve shift based on different interest rates?

A

with increased interest rates, the curve shifts up

with decreased interest rates, the curve shifts down

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13
Q

how does the IS curve shift based on different AE?

A

with an increase in AE, the curve shifts right

with a decrease in AE, the curve shifts left

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14
Q

how does the PC shift based on different production costs?

A

as input prices rise, the curve shifts up

as input prices fall, the curve shifts down

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15
Q

what happens if inflation expectations are unchanged?

A

the actual inflation rate will be 1% lower

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16
Q

what are the financial shocks that will shift the MP curve up?

A
  • increasing real federal funds rate
  • increasing risk premium
17
Q

what does the IS curve shift in response to?

A

changes in AE, including consumption, investment, government purchases, and net exports

18
Q

what determines how much the IS curve shifts?

A

the multiplier

19
Q

what is the formula for the multiplier?

A

delta GDP = delta spending * multiplier

20
Q

what are the spending shocks that will shift the IS curve left?

A

decreasing C, I, G, and NX

21
Q

what does the PC shift in response to?

A

changes in production costs, including input prices, productivity, and exchange rates

22
Q

what are the supply costs that will shift the philips curve up?

A

increasing input costs

decreasing productivity growth

depreciating currency

23
Q

what is stagflation?

A

a supply shock can cause output to decrease

stagflation is a combo of economic stagnation (falling output) combined with high inflation

actual and potential output decline