Before the financial crisis of 2007,inflation was on the rise.According to the MP curve,this would lead to ________.
A)an increase in the real interest rate
B)an upward shift of the MP curve,if policymakers opted for autonomous tightening
C)a decrease in aggregate output
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

According to the MP curve, an increase in inflation leads to an upward shift of the curve, which implies that policymakers will opt for tightening policies to reduce inflation. This autonomous tightening will lead to an increase in the real interest rate, which in turn will reduce aggregate output. So, all of the above options are correct.

Before the Financial Crisis of 2007,inflation Was on the Rise