Consider a closed economy where worries about the future risks cause households to try to increase the amount they save. By definition, saving can increase either through earning more income or choosing to consume less.

(a) Use the dynamic macroeconomic model to find the effects of this change on the real interest rate and the level of GDP. Graph with comments

(b) Now assume that nominal goods prices are sticky as in the New Keynesian model. Suppose the central bank follows a policy of strict interest targeting. Considering the same shock as in part (a), what happens to GDP if the central bank leaves its monetary policy unchanged? Explain. Graph with comments

(c) What action should the central bank take to obtain a better outcome for the economy than what you found in part (b)? Explain. Graph with comments

(d) If the central bank faces the ZLB problem, explain why higher expectations of future inflation can lead to a better outcome for the economy in the current time period. Explanation