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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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