Equilibrium income and monetary policy strategy: teaching macroeconomics with the MP curve

Rosaria Rita Canale

MPRA Paper from University Library of Munich, Germany

Abstract: The aim of the paper is to present a derivation of a simple tool describing monetary policy behaviour, useful to teach macroeconomic policies in open economies, the MP curve. The objective is to overcome the limits of the standard IS-LM model and underline the importance of the central bank strategy in influencing output and employment. We demonstrate that if the main policy instrument is the interest rate, the monetary policy authorities have very great influence in determining macroeconomic equilibrium. In fact the monetary policy strategy - of which the MP curve is the representation - is able to create, once given the dynamic supply curve and the IS curve, different levels of income in accordance to the inflation target, or different levels of inflation in accordance to the income target. Furthermore - because the nature and form of the MP curve depends both on constraints and targets the monetary policy considers and they might not be correctly interpreted - the central bank could assume a misleading behaviour, guiding the economic system toward a level of activity, not consistent with full employment and price stability

Keywords: teaching intermidiate macroeconomics; monetary policy strategy; equilibrium income (search for similar items in EconPapers)
JEL-codes: A20 E58 E61 (search for similar items in EconPapers)
Date: 2008-12-18
New Economics Papers: this item is included in nep-mac and nep-mon
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