A. Suppose a collapse in consumer spending lowers GDP below potential and causes deflation in the economy. With the monetary policy rule that follows the Taylor Principle (the typical one we assume in lecture) should the central bank increase GDP above potential GDP? Why? B. In order to increase GDP what must the central bank do to interest rates? Is it always possible to raise GDP by changing the nominal interest rate? Why or why not?

A. Suppose a collapse in consumer spending lowers GDP below potential and causes deflation in the economy. With the monetary policy rule that follows the Taylor Principle (the typical one we assume in lecture) should the central bank increase GDP above potential GDP? Why? B. In order to increase GDP what must the central bank do to interest rates? Is it always possible to raise GDP by changing the nominal interest rate? Why or why not?

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section: Chapter Questions

Problem 4QP

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