Suppose that consumption expenditures and investment expenditures are very inelastic with respect to the real interest rate. What does this imply about the power of monetary policy relative to fiscal policy in closing a positive output gap? Explain your results with the aid of diagrams.
Answer to relevant QuestionsAssume a two-period model where national income is 100 in the current period, and 120 in the future period. The world real interest rate is assumed to be 10% per period. The representative consumer always wishes to set ...In Chapter 13, we studied how persistent total factor productivity shocks in a closed economy can provide an explanation for business cycles. In the second model studied in this chapter, with production and investment, ...Suppose a flexible exchange rate. There is an increase in the degree of uncertainty in credit markets, which affects firms but not consumers, as considered in Chapter 9.(a) Determine the effects on aggregate output, the ...In the monetary intertemporal model, suppose the central bank issues money in exchange for capital, and rents this capital out to firms each period, thus earning the market real interest rate r on the capital. Over time, as ...Suppose that the private sector does not have rational expectations, but instead follows an adaptive expectations scheme. That is, the private sectors expected inflation rate is what the inflation rate was last period. Show ...
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