Prior to the coronavirus crisis, President Trump was very critical of the Federal Reserve and its chairman, Jerome Powell. Suppose that Chairman Powell resigned and was replaced with a new Federal Reserve Chairman who is less worried about inflation and sets interest rates lower than before. a) How would the IS and MP curves shift in response to the new Fed chairman?

b) What would happen to the real interest rate and output in the short run, according to the IS-MP model? Draw a diagram to help explain your answer. c) What would be the effect of the shock on consumption, investment, government purchases, and taxes? Briefly explain why.