Question 1: Zero Lower Bound (ZLB)

Suppose that you have a sticky price New Keynesian model in which the ZLB is binding. Consider an exogenous increase in credit spread (ftincreases).

a. Graphically analyze and show how this affects the equilibrium values ofeachof the endogenous variables of the model, including labor market variables. Explain!

b. Comment on how these effects compare relative to the case in which the ZLB does not bind.

c. Which policy can potentially be effective in stimulating the economy when the ZLB is binding? Which policy is probably ineffective in these situations? Explain!