Consider the IS curve in the following graph: Real interest rate (%) 6% 5% 4% 3% 2% 1% 0% -6% -4% -2% 0% 4% to 2% 4% to 3% Suppose the economy is in recession, with an output gap of -2%. To eliminate the output gap, the Federal Reserve might act to move the real interest rate from: 1% to 3% 2% 2% to 4% IS curve 4% 6% Output gap (%)

Consider the IS curve in the following graph: Real interest rate (%) 6% 5% 4% 3% 2% 1% 0% -6% -4% -2% 0% 4% to 2% 4% to 3% Suppose the economy is in recession, with an output gap of -2%. To eliminate the output gap, the Federal Reserve might act to move the real interest rate from: 1% to 3% 2% 2% to 4% IS curve 4% 6% Output gap (%)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. What is the long-term expected real interest rate? How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?
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