In the IS-MP model, the MP curve is upward sloping from left to right because it is assumed that
A) central banks have no control over interest rates.
B) central banks will raise interest rates when national income rises in order to dampen inflationary pressure.
C) central banks will increase the money supply when national income rises in order to dampen inflationary pressure.
D) monetary policy can have no effect on national income.

Question

Quizplus · Accepted Answer

The MP curve is upward sloping from left to right because it represents the relationship between the interest rate and the level of national income that is consistent with a steady rate of inflation. Central banks will raise interest rates when national income rises in order to dampen inflationary pressure. This is because higher national income can lead to higher demand for goods and services, which in turn can lead to higher prices. By raising interest rates, central banks can make borrowing more expensive and reduce demand, which helps to prevent inflation.

In the IS-MP Model, the MP Curve Is Upward Sloping