The economy is currently producing at potential output. The relationship between the real interest rate and short-run output is described by an IS curve with b = 0.5. The current real interest rate is 6% and the MPK is 3%. Now suppose that a negative aggregate demand shock causes short-run output to drop to -2.25%. To stimulate investment and bring the economy back to potential output, the central bank must set the real interest rates to percent.
The economy is currently producing at potential output. The relationship between the real interest rate and short-run output is described by an IS curve with b = 0.5. The current real interest rate is 6% and the MPK is 3%. Now suppose that a negative aggregate demand shock causes short-run output to drop to -2.25%. To stimulate investment and bring the economy back to potential output, the central bank must set the real interest rates to percent.
Chapter20: Monetary Policy
Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model
Problem 2SQ
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The economy is currently producing at potential output. The relationship between the real interest rate and short-run output is described by an IS curve with b = 0.5. The current real interest rate is 6% and the MPK is 3%. Now suppose that a negative aggregate
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