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The economy of Germany is characterized by the following relations. AniSCurve Yy =@ b(R; 7) A Fisher equation: Ry = 4 + fi Eymeqn A
The economy of Germany is characterized by the following relations. AniSCurve Yy =@ b(R; 7) A Fisher equation: Ry = 4 + fi Eymeqn A monetary policy rule: 2 = 7 + x + m(m T) + Eyminy A Zero Lower Bound constraint: 4; = 0 A Phillips curve: my = Ey_ym: + /Y, Where f; is a shock to interest rate spreads. f; takes positive values when banks are having financial distress in their balance sheets, and ; is a monetary policy shock. The economy of Germany suffers a financial shock, so f; = 0.01. One journalist writes in the newspaper that by setting y; = 0.01, the central bank can ensure the economy will have short-run output equal to zero and inflation equal to the inflation target. Which of the following statements is correct? () The journalist is correct only in the case in which the Aggregate Supply curve is flat () The journalist is correct only in the case where inflation expectations are adaptive () The journalist is incorrect regardless of any other detail () The journalist is correct @ The journalist is correct in the case in whichb = m i) The journalist is correct only in the case in which the ZLB is not binding i) The journalist is correct only if the economy is at the ZLEB i) The journalist is correct in the case where the Aggregate Supply curve is vertical
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