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Imagine two economies. In Economy A, the central bank responds more to changes in inflation when setting interest rates than the central bank in Economy
Imagine two economies. In Economy A, the central bank responds more to changes in inflation when setting interest rates than the central bank in Economy B. That is m_A>m_B, , where m_A and m_B are the parameters of the monetary policy rule of country A and country B, respectively. Imagine the government in both countries increase its expenditures by 1% of potential GDP, so ag = 0.01 in both countries. Both countries have upward-sloping aggregate supply curves and downward-sloping aggregate demand curves. According to our AS-AD model, which country will experience more crowding out of investment? Same crowding out It is impossible to determine Country A Country B
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