Three countries are in a currency union. The countries are identical in that each has the same equilibrium level of output of £50 billion consistent with the same real interest rate of 2%, but each country is currently experiencing a different level of inflation as shown in Table 1. If the central bank for the currency union sets its (nominal) base rate at 7%, which one of the countries is likely to see an increase in its aggregate demand? (Hint: you need to use the real interest rate equation given in Chapter 8, Section 2.2 and may wish to review Chapter 8, Section 2.4.) Table 1 Information about three countries Country A Country B Country C Equilibrium output £50 billion £50 billion £50 billion Equilibrium real 2% 2% 2% interest rate Inflation rate 2% 5% 9% Select one: O Country A O Country B O Country C

Three countries are in a currency union. The countries are identical in that each has the same equilibrium level of output of £50 billion consistent with the same real interest rate of 2%, but each country is currently experiencing a different level of inflation as shown in Table 1. If the central bank for the currency union sets its (nominal) base rate at 7%, which one of the countries is likely to see an increase in its aggregate demand? (Hint: you need to use the real interest rate equation given in Chapter 8, Section 2.2 and may wish to review Chapter 8, Section 2.4.) Table 1 Information about three countries Country A Country B Country C Equilibrium output £50 billion £50 billion £50 billion Equilibrium real 2% 2% 2% interest rate Inflation rate 2% 5% 9% Select one: O Country A O Country B O Country C

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter14: Modern Macroeconomics And Monetary Policy

Section: Chapter Questions

Problem 15CQ

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