Suppose the policy interest rate controlled by the central bank and the inflation rate were both zero.

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Suppose the policy interest rate controlled by the central bank and the inflation rate were both zero. Explain in terms of the aggregate demand-aggregate supply framework how the economy could fall into a deflationary spiral if it were hit by a negative aggregate demand shock.

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Money Banking and Financial Markets

ISBN: 978-0078021749

4th edition

Authors: Stephen Cecchetti, Kermit Schoenholtz

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