Question

Hello all, looking for some help on these monetary policy theory practice questions. Thank you!

1.) The aggregate demand curve is kinked at _____ (the zero lower bound / the zero inflation rate) because an inflation rate decreases the real-interest rate (increases / decreases); thus decreasing the aggregate quantity demanded.

2.) The Abenomics program sought to lower financial frictions through the purchase of long-term assets. What is the purpose of lowering financial frictions?

Lowering financial frictions would _____ on investments and shift the aggregate demand curve to the ______.

a.) lower the nominal interest rate; right

b.) raise the real interest rate; left

c.) lower the real interest rate; right

d.) raise the nominal interest rate; left

3.) Suppose there is an aggregate demand shock. In this case:

a.) there is a conflict between stabilizing inflation and economic activity both in the short run and in the long run.

b.) stabilizing inflation stabilizes economic activity even in the short run

c.) stabilizing inflation stabilizes economic activity only in the long run.

d.) there is a tradeoff between stabilizing inflation and stabilizing economic activity in the short run

Answer 1

Answer:

1) 1.) The aggregate demand curve is kinked at _____

the zero lower bound

2) Lowering financial frictions would _____ on investments and shift the aggregate demand curve to the ______.

c.) lower the real interest rate; right

lowering financial friction leads to increase in aggregate demand as interest rate decrease and investment increases  

3.) Suppose there is an aggregate demand shock. In this case:

b.) stabilizing inflation stabilizes economic activity even in the short run