2. During recessions, central banks tend to cut interest rates. You are interested in understanding the question of how interest rates affect GDP. You look in the data and see that interest rates tend to be low when GDP is low (i.e. the interest rate is pro-cyclical). Why do you think this simple correlation might give a misleading sense of the effect of changes in the interest rate on GDP? How might a model help you answer this question?
2. During recessions, central banks tend to cut interest rates. You are interested in understanding the question of how interest rates affect GDP. You look in the data and see that interest rates tend to be low when GDP is low (i.e. the interest rate is pro-cyclical). Why do you think this simple correlation might give a misleading sense of the effect of changes in the interest rate on GDP? How might a model help you answer this question?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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