REQUIRED INFORMATION TO SOLVE THE QUESTION:

THE REAL INTEREST RATE

10 8 6 4 Interest Rate in Percent 2 0 -2F -4- -6 1960 1970 1980 1990 2000 2010 2020 Year The figure shows a measure of the real interest rate, which here is the short-term nominal interest rate minus the actual rate of inflation. Monetary policy can have a short-run effect on the real interest rate; for example, the high real interest rates in the 1980s are often attributed to tight monetary policy. Monetary policy has been quite accommodationince the last recession, with low or negative real rates.5. (20 points) Let's compare the Canadian economy in 2010 to the current economy. The two major changes between 2010 and 2020 are: (1) total factor productivity has permanently increased (2: and 2." both increase); and (2) the capital stock, K, has increased. (a) Using the real intertemporal model we developed in class, show graphically how these changes have affected output, employment, real wages and the real interest rate. What happens to consumption? Based on your answer to question 4(e), what happens to investment? (b) Show that it is possible that the real interest rate remains unchanged. Look briey at gure 1.10 (page 19) in the Williamson book between 2010 and 2020. According to this chart, is it realistic for real interest rates in a growing economy to show no long-term trend