According to the IS-MP-PC model, a negative temporary investor sentiment shock will cause
A)permanently higher GDP
B)temporarily lower GDP.
C)permanently higher inflation
D)temporarily higher inflation.

Question

Quizplus · Accepted Answer

According to the IS-MP-PC model, a negative temporary investor sentiment shock will cause a temporary decrease in GDP. This is because the negative sentiment shock will cause a decrease in investment, which will shift the IS curve downward and to the left, leading to a decrease in both output and the interest rate. However, this effect is only temporary as the central bank can respond by lowering the nominal interest rate, causing the MP curve to shift downward and to the right, which stabilizes output at its natural rate in the long run. The negative sentiment shock does not have a significant impact on inflation according to this model.

According to the IS-MP-PC Model, a Negative Temporary Investor Sentiment