D the nominal interest rate is close to zero in us

This preview shows page 2 - 3 out of 7 pages.

d) The nominal interest rate is close to zero in US currently (also low in Canada). Comment on theeffect of (new) monetary policy on investment and real GDP in US if US people expect higherinflation due to the continuous monetary expansion in the last few years.
e) Suppose that the expected rate of inflation suddenly jumped. What would happen--with noother changes in the economic environment--to the IS-LM equilibrium? Would equilibrium realGDP go up or down? Would the equilibrium real interest rate go up or down?
f) An automatic stabilizer is a policy that reduces the amplitude of economic fluctuations withoutregular and deliberate changes in economic policy. Consider for example a progressive taxsystem (like in Canada) below: Suppose that a household earning $60000 must pay 30% of income tax. Suppose that ifhousehold income drops, say to $40000, the tax rate becomes 25%. Explain why such aprogressive tax system in this case can help in reducing the impact of a fall in household incomeon real GDP.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture