Suppose that there are two simultaneous developments. First, government purchases are reduced. Second, the central bank changes its interest rate rule so that its desired real interest rate for a given level of output and inflation is lower than before. Describe whether the combined effect of these two developments will be to raise, lower, or have no effect (or whether it is not possible to determine the effect) on output and the real interest rate in the short run if: a. Monetary policy is not constrained by the zero lower bound on the nominal interest rate. b. Monetary policy is constrained by the zero lower bound before the developments occur.
Suppose that there are two simultaneous developments. First, government purchases are reduced. Second, the central bank changes its interest rate rule so that its desired real interest rate for a given level of output and inflation is lower than before. Describe whether the combined effect of these two developments will be to raise, lower, or have no effect (or whether it is not possible to determine the effect) on output and the real interest rate in the short run if: a. Monetary policy is not constrained by the zero lower bound on the nominal interest rate. b. Monetary policy is constrained by the zero lower bound before the developments occur.
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter23: Aggregate Demand And Aggregate Supply
Section: Chapter Questions
Problem 4CQQ
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![Suppose that there are two simultaneous developments. First, government purchases are reduced.
Second, the central bank changes its interest rate rule so that its desired real interest rate for a
given level of output and inflation is lower than before.
Describe whether the combined effect of these two developments will be to raise, lower, or have no
effect (or whether it is not possible to determine the effect) on output and the real interest rate in
the short run if:
a.
Monetary policy is not constrained by the zero lower bound on the nominal interest rate.
b.
Monetary policy is constrained by the zero lower bound before the developments occur.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe40b42e7-38ce-41d2-a422-97f5b6226603%2F23c23684-9889-44ab-a6bd-1b252a5e930d%2Fo4s2p9p_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Suppose that there are two simultaneous developments. First, government purchases are reduced.
Second, the central bank changes its interest rate rule so that its desired real interest rate for a
given level of output and inflation is lower than before.
Describe whether the combined effect of these two developments will be to raise, lower, or have no
effect (or whether it is not possible to determine the effect) on output and the real interest rate in
the short run if:
a.
Monetary policy is not constrained by the zero lower bound on the nominal interest rate.
b.
Monetary policy is constrained by the zero lower bound before the developments occur.
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