# The monetary policy curve indicates relationship between health Learn vocabulary, terms, and more with flashcards, games, and other study tools. The monetary policy (MP) curve indicates the relationship between. the real. Learn vocabulary, terms, and more with flashcards, games, and other study tools. The monetary policy (MP) curve indicates the relationship between. The real. The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that shows the Since this is a non-dynamic model, there is a fixed relationship between the Each point on the curve represents the equilibrium between the Savings and Investment (S=I). . The IS–LM model also allows for the role of monetary policy.

The horizontal axis represents national income or real gross domestic product and is labelled Y. The vertical axis represents the real interest rater.

### II. Monetary policy: a narrow normalisation path

Since this is a non-dynamic model, there is a fixed relationship between the nominal interest rate and the real interest rate the former equals the latter plus the expected inflation rate which is exogenous in the short run ; therefore variables such as money demand which actually depend on the nominal interest rate can equivalently be expressed as depending on the real interest rate.

The point where these schedules intersect represents a short-run equilibrium in the real and monetary sectors though not necessarily in other sectors, such as labor markets: This equilibrium yields a unique combination of the interest rate and real GDP. IS curve[ edit ] IS curve represented by equilibrium in the market for loanable funds and Keynesian cross diagram.

For the investment-saving curve, the independent variable is the interest rate and the dependent variable is the level of income. Note that scientific graphs typically place the independent variable—interest rate, in this example—on the vertical axis while the dependent variable is measured with the horizontal axis. Y on the horizontal axis. To keep the link with the historical meaning, the IS curve can be said to represent the equilibria where total private investment equals total saving, where the latter equals consumer saving plus government saving the budget surplus plus foreign saving the trade surplus.

### IS–LM model - Wikipedia

In equilibrium, all spending is desired or planned; there is no unplanned inventory accumulation. Thus the IS curve is a locus of points of equilibrium in the "real" non-financial economy. The shortest-term treasury bills 1 are mainly determined by monetary policy. The federal funds rate is then the main point of reference for various short-term interest rates including the rate on short-term treasury bills.

Can a Rule-Based Approach to Monetary Policy Enhance Economic Growth and Stability?

Furthermore, the expectation hypothesis implies that holding a one-year bond and rolling the investment over into a new one-year bond each year for 10 years would result in the same wealth as investing in a year bond. In other words, short-term bonds that add up to the same maturity as a single long-term bond are collectively a perfect substitute for the long-term bond.

## II. Monetary policy: a narrow normalisation path

In mathematical form the return on a long-term bond can be expressed as: This formula shows that the return on a long-term bond is the geometric mean of the expected return on several short-term bonds that add up to the same maturity. Risk premiums because lending money for a longer period of time is usually riskier than lending money for a shorter period of time: The expectation theory fails to explain the persistence of an upward sloping yield curve in the long run because in that period consisting of several business cyclesshort-term interest rates are just as likely to rise as they are to fall. The more-often-than-not upward slope of the yield curve is due to an additional component of yield on long-term bonds—a risk premium. The risk premium serves as a hedge against possible loss of capital over time and consists of: Real risk premium Inflation risk premium 3.