Once you have identified the output gap in the IS-MP graph in the Fed model, how would you connect to the Phillips curve?
A)Trace the inflation rate from the IS-MP model down to the same inflation rate in the Phillips curve.
B)Trace the real interest rate from the IS-MP model down to the same real interest rate in the Phillips curve.
C)Trace the unemployment rate from the IS-MP model down to the same unemployment gap in the Phillips curve.
D)Trace the output gap from the IS-MP model down to the same output gap in the Phillips curve.

Question

Quizplus · Accepted Answer

The best choice is to trace the output gap from the IS-MP model down to the same output gap in the Phillips curve. This is because the output gap is the difference between actual and potential output, which is the key variable that drives inflation in the Phillips curve. By tracing the output gap, we can see the corresponding level of inflation in the Phillips curve, and therefore understand the relationship between output and inflation in the economy.

Once You Have Identified the Output Gap in the IS-MP