Suppose the Fed wants to set the realinterest rate 1 percentage point lower thanthe inflation rate. Nominal interest ratescannot fall below zero.a. Graph the MP curve for inflation valuesbetween -2% and 2%.b. Graph the AD curve. Label the inflationrate at which it kinks.

Answered: st rate 1 percentage point lower…

st rate 1 percentage point lower flation rate. Nominal interest rate ot fall below zero. ph the MP curve for inflation val een -2% and 2%. aph the AD curve. Label the inflat t which it kinks.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter16: Expectations Theory And The Economy

Section16.5: Looking At Things From The Supply Side: Real Business Cycle Theorists

Problem 2ST

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Unemployment and Cost of Unemployment

Unemployment is the state of being unemployed, even when an individual is actively seeking work opportunities. The unemployment rate refers to the percentage of the workforce that is currently unemployed.

Question

Suppose the Fed wants to set the real
interest rate 1 percentage point lower than
the inflation rate. Nominal interest rates
cannot fall below zero.
a. Graph the MP curve for inflation values
between -2% and 2%.
b. Graph the AD curve. Label the inflation
rate at which it kinks.

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