Analyzing Macroeconomic Events with the IS-MP Diagram. Consider the following events in the macroeconomy. Show how to think about them using the IS-MP diagram. For each, explain how and why GDP in the United States is affected in the short run and show how the central bank should respond if it wishes to stabilize output. (a) The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they get a credit that reduces the taxes they pay on corporate income. (b) A housing bubble bursts, so that housing prices fall by 20% and new home sales drop sharply. (c) A resurgence of growth in Japan leads to an unexpected increase in the demand by Japanese consumers for U.S. goods.
Analyzing
(a) The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they get a credit that reduces the taxes they pay on corporate income.
(b) A housing bubble bursts, so that housing prices fall by 20% and new home sales drop sharply.
(c) A resurgence of growth in Japan leads to an unexpected increase in the
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