Using the IS-MP model, explain what happens to output and the real interest rate when the IS curve shifts to the right and when it shifts to the left, and when the MP curve shifts up and when it shifts down?
What will be an ideal response?
All else equal, when the IS curve shifts to the right, output increases and the real interest rate does not change, and when the IS curve shifts to the left, output decreases and the real interest rate does not change.
All else equal, when the MP curve shifts up, output decreases and the real interest rate increases, and when the MP curve shifts down, output increases and the real interest rate decreases.
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