IS-MP-PC

Question 1

what is the fed model?

Answer 1

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

Question 2

what are we able to forecast using the fed model?

Answer 2

interest rates, output gap, and inflation

Question 3

how do we forecast economic outcomes?

Answer 3

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

next, use the Philips curve to assess inflation

Question 4

how do you use to fed model to forecast inflation?

Answer 4

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

Question 5

what are the three types of macroeconomic shocks?

Answer 5

1) financial
2) spending
3) supply

Question 6

what curve do financial shocks shift?

Answer 6

MP curve

Question 7

what curve do spending shocks shift?

Answer 7

IS curve

Question 8

what curve do supply shocks shift?

Answer 8

philips curve

Question 9

what does the IS-MP framework determine?

Answer 9

output gap

Question 10

what does the PC determine?

Answer 10

inflation

Question 11

what are the steps for analyzing macroeconomic shocks?

Answer 11

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

Question 12

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

Answer 12

with increased interest rates, the curve shifts up

with decreased interest rates, the curve shifts down

Question 13

how does the IS curve shift based on different AE?

Answer 13

with an increase in AE, the curve shifts right

with a decrease in AE, the curve shifts left

Question 14

how does the PC shift based on different production costs?

Answer 14

as input prices rise, the curve shifts up

as input prices fall, the curve shifts down

Question 15

what happens if inflation expectations are unchanged?

Answer 15

the actual inflation rate will be 1% lower

Question 16

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

Answer 16

• increasing real federal funds rate
• increasing risk premium

Question 17

what does the IS curve shift in response to?

Answer 17

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

Question 18

what determines how much the IS curve shifts?

Answer 18

the multiplier

Question 19

what is the formula for the multiplier?

Answer 19

delta GDP = delta spending * multiplier

Question 20

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

Answer 20

decreasing C, I, G, and NX

Question 21

what does the PC shift in response to?

Answer 21

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

Question 22

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

Answer 22

increasing input costs

decreasing productivity growth

depreciating currency

Question 23

what is stagflation?

Answer 23

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