Using the T-accounts of commercial bank A and of the FED, represent the following scenarios. Assume that the monetary policy curve is given by r = 1.5 + .75.

1. Calculate the real interest rate when inflation is 2% and 4%.

2. Draw a graph of the MP curve labeling the points from part 1. 1

3. Assume now that the monetary policy curve is given by r = 2.5 + .75. Does the new monetary policy curve represent an autonomous tightening or loosening of monetary policy?

4. Calculate the real interest rate when inflation is 2% and 4% and draw the new MP curve, showing the shift from part 2.