In the IS-MP model,when the Fed increases the real interest rate
A) the MP curve shifts up resulting in a decline in the output gap.
B) the MP curve shifts up resulting in an increase in the output gap.
C) the MP curve shifts down resulting in a decline in the output gap.
D) the MP curve shifts down resulting in an increase in the output gap.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the real interest rate, it effectively makes borrowing more expensive, which tends to reduce investment and spending. In the IS-MP model, this is represented by an upward shift in the Monetary Policy (MP) curve, leading to a decline in the output gap as the economy slows down.

In the IS-MP Model,when the Fed Increases the Real Interest