IS-MP-PC Flashcards
what is the fed model?
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
what are we able to forecast using the fed model?
interest rates, output gap, and inflation
how do we forecast economic outcomes?
first use the IS-MP framework to determine the output gap
next, use the Philips curve to assess inflation
how do you use to fed model to forecast inflation?
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
what are the three types of macroeconomic shocks?
1) financial
2) spending
3) supply
what curve do financial shocks shift?
MP curve
what curve do spending shocks shift?
IS curve
what curve do supply shocks shift?
philips curve
what does the IS-MP framework determine?
output gap
what does the PC determine?
inflation
what are the steps for analyzing macroeconomic shocks?
- identify the shock, and shift the curve
- find the output gap
- assess inflation
how does the MP curve shift based on different interest rates?
with increased interest rates, the curve shifts up
with decreased interest rates, the curve shifts down
how does the IS curve shift based on different AE?
with an increase in AE, the curve shifts right
with a decrease in AE, the curve shifts left
how does the PC shift based on different production costs?
as input prices rise, the curve shifts up
as input prices fall, the curve shifts down
what happens if inflation expectations are unchanged?
the actual inflation rate will be 1% lower