Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hi. Can you please explain the teachers answer to this question? Is it possible that the economy will enter a deflation trap in 2019? Under

Hi. Can you please explain the teachers answer to this question?

Is it possible that the economy will enter a deflation trap in 2019? Under what circumstances?

"A deflation trap is a situation in which deflation increases the real interest rate, which leads to lower economic activity, which leads to further deflation, a further increase in the real rate etc. This may happen when the nominal interest rate hits the zero lower bound, so that the central bank cannot lower the nominal rate enough to achieve a decrease in the real interest rate. In d), the central bank needs to decrease the nominal rate in order to decrease the real rate. With an inflation rate of -3% in 2019, this means that the nominal rate needs to be decreased by more than 3% in order to achieve a decrease in the real rate ( = ). So if the nominal rate was lower than 3% at the start of 2019, the central bank cannot achieve its goal, and the economy might get into a deflation trap."

In particular, why would the nominal rate need to be more that 3&? can you show how to know that?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Understandable Statistics Concepts And Methods

Authors: Charles Henry Brase, Corrinne Pellillo Brase

9th Edition

0618986928, 978-0618986927

Students also viewed these Economics questions