MP(7I’0) MP(1r1) (1T1 amp;lt; m) IIIIIII/If’IIIIrIIIIIII IIIIIIIIIII Output Output Figure IV3.

Draw an IS-MP diagram for the IS curve and the MP(π1) curve from the figure. Assume that inflation expectations π^e = π1> 0, and assume that the IS and MP curves intersect at a real interest rate that is above 0.What is the real interest rate that the central bank sets in equilibrium,and what is the real interest rate that the central bank would like to set if there was no zero lower bound constraint?