Consider the Keynesian sticky wage model. Assume that the economy is operating close to, but not at, its zero lower bound (ZLB). Discuss the following: 1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate graph-ically. 2. Could a shock to current productivity z make the ZLB bind? What would need to be the sign of this shock to make the ZLB bind? 3. In the data, in most episodes where the ZLB binds (the US in the wake of the Great Recession, Japan during the 1990s, and the US during the Great Depression), output is low. Given this, would a supply shock as the reason for a binding ZLB make empirical sense? 4. Intuitively, explain why changes in government spending have a bigger effect on output at the ZLB than away from it.

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Consider the Keynesian sticky wage model. Assume that the economy is operating
close to, but not at, its zero lower bound (ZLB). Discuss the following:
1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate
graph- ically.
2. Could a shock to current productivity z make the ZLB bind? What would need to
be the sign of this shock to make the ZLB bind?
3. In the data, in most episodes where the ZLB binds (the US in the wake of the
Great Recession, Japan during the 1990s, and the US during the Great Depression),
output is low. Given this, would a supply shock as the reason for a binding ZLB make
empirical sense?
4. Intuitively, explain why changes in government spending have a bigger effect on
output at the ZLB than away from it.
Transcribed Image Text:Consider the Keynesian sticky wage model. Assume that the economy is operating close to, but not at, its zero lower bound (ZLB). Discuss the following: 1. Could a negative shock to the IS curve make the ZLB bind? Explain and illustrate graph- ically. 2. Could a shock to current productivity z make the ZLB bind? What would need to be the sign of this shock to make the ZLB bind? 3. In the data, in most episodes where the ZLB binds (the US in the wake of the Great Recession, Japan during the 1990s, and the US during the Great Depression), output is low. Given this, would a supply shock as the reason for a binding ZLB make empirical sense? 4. Intuitively, explain why changes in government spending have a bigger effect on output at the ZLB than away from it.
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