Question

In order for monetary policy to be infective, what would the slope of the PC need to be in the IS/PC/MR model?

Answer 1

Slope of the Philips Curve has to be downward sloping which means higher unemployment corresponding to lower inflation and vice versa. Hemce the monetary policy by central bank can be infective when cut in interest rates lead to higher liquidity in market which helps firms to have higher cash flows and thus generating employment opportunities. This leads to lower unemployment, jigher disposable incomes, higher consumption and thus rise in inflation and aggregated output.

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