This question uses the Macroeconomic Simulator available from the Carlin and Soskice website http://www.oup.com/uk/orc/carlin.soskice to show the destabilizing real interest rate channel. Begin by opening the simulator and selecting the open economy (fixed exchange rates without endogenous fiscal policy) version. Then reset all shocks by pressing the appropriate button on the left hand side of the main page. Use the simulator and the content of this chapter to work through the following:

(a) Apply a \(2 \%\) inflation shock.

(b) Use the impulse response functions to describe the path of the economy after the shock.

(c) Is the economy self-stabilizing in this scenario?

(d) Use the 3-equation model to explain how the real interest rate channel can lead to this outcome.