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For each of the following, describe how (if at all) the IS curve, MP curve and...

For each of the following, describe how (if at all) the IS curve, MP curve and AD curves are affected.

An increase in financial frictions
A decrease in current inflation rate
An increase in taxes and an autonomous easing of monetary policy

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Answer #1

If there is an increase in taxes, and an autonomous easing of monetary policy then

The IS curve shifts to the left and the economy moves along the IS curve, the MP curve shifts down, and the net effect on the AD curve cannot be definitely.

This is because an increase in taxes is an example of contractionary fiscal policy which will shift the IS curve to the left and due to easing in monetary policy(i.e., expansionary monetary policy) will lead to a downward shift of MP curve. But the effect on AD curve is not determined because, due to a reduction in taxes AD curve will shift to the left that means AD will decreases and due to easing in monetary policy that means a increases in money supply will increase the AD which will shift the AD curve to the right. So it cannot be determined how much change happens there.

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