The graph below shows the IS€“MP model. Suppose that the economy is currently in equilibrium at point A.

Suppose that the government pursues an expansionary fiscal policy, as shown by the shift of the IS curve to the right, from to.
a. Suppose the MP curve does not shift. What are the effects on the output gap, the real interest rate, and net capital outflows?
b. Suppose the Fed changes policy to keep the real interest rate constant at its initial value. What are the effects on the output gap, and net capital outflows?
c. Suppose the Fed changes policy to keep the output gap constant at its initial value. What are the effects on the real interest rate and net capital outflows?

Transcribed Image Text:

은鸟 MP IS2 IS output gap,Y (percent deviation from potential GDP)