Suppose the economy is just recovering from a recession and all signs

Suppose the economy is just recovering from a recession and all signs now point to robust growth. How might this transition from recovery to expansion be reflected in the monetary policy curve?

What will be an ideal response?

ANSWER

The monetary policy curve will have been relatively low, as policy makers kept interest rates as low as possible to hasten recovery from the recession. Once the recession is over, the monetary policy curve will shift up, since low interest rates are no longer appropriate, and to reduce the danger that spending will climb too rapidly and cause inflation to rise. The curve may become steeper, as well, so that any increases in inflation are countered by substantial increases in the real interest rate.