Question
Suppose the monetary policy curve is r = 5 + 0.8, and the current values for output and inflation are 16.8 and 2 percent, respectively.
Suppose the monetary policy curve is r = 5 + 0.8, and the current values for output and inflation are 16.8 and 2 percent, respectively. An increase in global resource prices pushes the inflation rate to 4 percent. Policymakers estimate that the monetary policy in place, responding to 4 percent inflation, will bring output down to 13.6, a decline considered excessive. Instead, they implement an autonomous fiscal policy to lower output from 16.8 to 16. Assuming no change in the slope of the monetary policy curve, determine the new IS curve. (Tip: Assume linear IS curve and you can calculate the IS curve from policy makers' estimation)
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