Suppose a Country Is Experiencing a Deflation While Real GDP

question 131

Essay

Suppose a country is experiencing a deflation while real GDP is below potential GDP.
(A) If the cauntry's central bank decices it wants to reinflate the economy, what type of policy shauld it pursue?
(B) Suppose this policy is enacted. What will happen to the real interest rate and investment when the economy returns to potential?
(C) Suppose the central bank decides not to reinflate the economy, and the econamy eventually return to potential GDP. How wril the lang-run equilibrium values for the real interest rate and investment differ from your answer in (B)?

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