EBK THE ECONOMICS OF MONEY, BANKING AND
EBK THE ECONOMICS OF MONEY, BANKING AND
4th Edition
ISBN: 8220100668203
Author: Mishkin
Publisher: PEARSON
Question
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Chapter 24, Problem 30AP
To determine

  1. By using MP curve and AS/AD graph, how a sufficiently large financial panic could pull the economy below the zero lower bound and into a destabilizing deflationary spiral.
  2. By using MP curve and AS/AD graph, how a sufficient amount of asset purchases could reverse the effects of financial panic.
Given:

f is given by two factors: financial panic and asset purchases.

Concept:

Federal funds rate − The nominal rate of interest is the federal funds rate. Below zero value is not probable for the federal funds rate. When the financial establishments provide loans in the fed funds markets and earn lesser returns than the returns they earn by cash holdings, then the federal rate is negative.

Zero lower bound − On the policy rate, the zero floor is known as zero lower bound.

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