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According to empirical evidence, nominal interest rates are procyclical. They rise when the economy booms and...

According to empirical evidence, nominal interest rates are procyclical. They rise when the economy booms and they fall during recessions. Is this empirical evidence consistent with DAD-DAS models? Explain and use graphs to illustrate your answer.

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Answer #1

As economy booms, consumption level rises which raise the overall aggregate demand in an economy which shift the aggregate demand curve to its right while aggregate demand supply curve remains the same. It will raise the price as well as output level.

- - - - - - (

As aggregate demand curve shifts to its right, it will shift the IS curve to its right while LM curve remains the same. It raise the interest rate from i to i1 while output rises from Y to Y1.

Interest Rate im - - - - - - و ,لا Output

In Recession, consumption falls as people willingness to pay for goods falls which will shift the aggregate demand to its left from AD to AD1 while supply curve remains the same. It reduce the price as well as output level.Real 9.As aggregate demand falls, it shifts the IS curve to its left while LM curve remains the same. It reduce the rate of interest of interest from i to i1 as well as level of output from Y to Y1.

— 9 9 a X - - - - - ? W fate Interest F1Thus we can say that interest rate are dynamic and changes with economic recession or boom.

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