1 What were the inflation rates in 2005 and 2009? The following items are (approximate) facts about the US economy before and after the global fi nancial crisis:

◆ In 2005, the nominal interest rate on bonds was 5 per cent a year and the real interest rate was 2 per cent a year. Investment was $2.7 trillion and the government budget defi cit was $0.5 trillion.

◆ By 2009, the real interest rate had increased to 5 per cent a year, but the nominal interest rate was unchanged at 5 per cent a year. Investment had crashed to $1.8 trillion and the government budget defi cit had climbed to $1.8 trillion.

Assume that the private demand for and private supply of loanable funds did not change between 2005 and 2009.