Question

A movement along the mp curve _____

a. implies an autonomous adjustment to the interest rate at any given rate of inflation
b. implies an automatic adjustment of the interest rate in response to changes in inflation
c. implies an autonomous adjustment of aggregate demand
d. implies an autonomous adjustment of the is curve

Answer 1

A movement along the MP curve represents option b. an automatic adjustment of the interest rate in response to changes in inflation, as per the rules of monetary policy.

Step-by-step explanation:

A movement along the MP curve implies an automatic adjustment of the interest rate in response to changes in inflation. This is rooted in monetary policy rules, such as the Taylor rule, which suggest how central banks adjust nominal interest rates as inflation deviates from its target level. The MP curve, which is short for Monetary Policy curve, represents this relationship in macroeconomic models. It shows how policy rates set by the central bank react to changes in the economy, particularly inflation. In such models, a movement along the MP curve does not suggest an autonomous adjustment of aggregate demand or the IS curve, but rather an interest rate adjustment that's responsive to the inflation rate.