Question

Can someone answer question 2a,b,c please and explain im confused

The Great Depression in the United Kingdom: 1. Explain what you understand by the term deflationary spiral on the basis of the IS-LM-PC model shown in the textbook? 2. Answer the following questions based on information found in the table below: Output Unemployment One-Year Nominal Inflation Rate One-Year Real Year Growth Rate Rate (%) Interest Rate %), i (%), P Interest Rate (%), r (%) 1929 10.4 3.0 5.0 -0.90 5.9 1930 21.3 - 1.0 3.0 - 2.8 5.8 1931 22.1 - 5.0 6.0 - 4.3 10.3 193219.9 0.4 2.0 - 2.6 4.6 1933 16.7 2.0 3.3 - 2.1 a. Is there evidence of the deflation spiral from 1929 to 1933 in the United Kingdom? Explain your answer. b. Is there evidence of the effect of high real interest rates on output? Explain your answer. c. Is there evidence of a poor choice of the real policy interest rate by the central bank? Explain your answer.

Answer 1

a. Yes, there is evidence of deflation spiral from 1929 to 1933 in the UK as the inflation rate is negative each year which shows that the rate is decreasing rach year.

b. High real interest rate reduces the output as it becomes costlier to borrow. As we can see as the real interest rate rises from 1929-1931 the real output falls and become negative, on the other hand when it reduces from 1931-1933 the output growth rate increases.

c. Real interest rate=nominal interest rate-inflation. As the inflation reduces real interest rate rises. Rise of real interest rates lead to fall in output as it is expensive for people to borrow money. Fall in output also leads to rise in unemployment rate. All of this is an evidence of poor choice of real policy interest rate by the Central Bank.