Question: Use the following data to show the initial full SR eqm using the Extended IS-LM : x = 0.5%; i = 2%; and the expected

Use the following data to show the initial full SR eqm using the Extended IS-LM: x = 0.5%; i = 2%; and the expected inflation rate, ^e = 1%.

a. What is the policy rate? The borrowing rate? Show the full SR eqm; provide as much information as you can.

b. If the risk premium rises to 4%, cet. par., what rate changes and which curve(s) shift? Show and explain.

c. Can traditional Monetary Policy (MP) be used to get us back to the initial Y? Why or why not? Make the appropriate calculations and provide appropriate term(s); assume the expected inflation rate is fixed.

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