The mp curve is drawn for a given inflation rate the

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Unformatted text preview: of economic activity. The MP curve is drawn for a given inflation rate. The arrow shows the consequence of an exogenous shift in the policy reaction function that implies a lower interest rate for any given level of economic activity. 28 Journal of Economic Perspectives the the LS curve down and to the right, as shown by the arrow. It should also reduce the demand for loans, insofar as borrowers have more current income available out of which to finance current spending needs or opportunities, in which case the LD curve shifts down and to the left, as also shown in the figure. The vertical shift in the LD curve is likely to be smaller than the vertical shift of the LS curve, as shown in Figure Figure 2A, if the expenditure of borrowers is more interest-elastic than the expenditure ture of savers. The intersection of the grey curves shows the new equilibrium values, i2 and L2. Tracing Tracing out the equilibrium interest rate for any assumed level of current income Y, one obtains the IS schedule plo...
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