Chapter 15, Problem 7PA

 (a)

To determine

The effect of changes in natural rate of interest $\left({\text{ρ}}_{\text{t}}\right)$ on dynamic aggregative demand (DAD) and dynamic aggregative supply (DAS) curves.

 (b)

To determine

The effect of shock to ${\text{ρ}}_{\text{t}}$ on output level, inflation rate, the nominal interest rate, and the real interest rate.

 (c)

To determine

The difficulties faced by the central bank if the natural rate of interest $\left({\text{ρ}}_{\text{t}}\right)$ varies over time.