Question

Can someone please properly answer the 3 questions listed below? I'd really appreciate it.

And also, please (TYPE) everything out.

27- Considering a central bank for which the keeping the price level stable is much more important than stabilizing the output level. Draw the AD curve associated with this central bank.

28- Explain the binding situation and draw the Fed Rule and AD curve associated with binding situation.

29- What is stagflation?

Answer 1

Central bank which looks to keep inflation in control and letting the GDP slip will naturally adopt contractionary monetary policy by increasing interest rates or selling government securities through open market operations.

This will lead to liquidity crunch in economy and hence consumption and Aggregate demand reduces which further causes prices and real GDP to fall. Thus falling prices lead to subdued inflation and hence deflationary effect.

The binding situation is characterized by zero level interest rates and to boost economy Central banks adopt different tools like buying back government securities through OMO using expansionary monetary policy. This increases liquidity injection in system and is flushed with funds. This increases demand aggregate and hence prices rise alongwith real GDP growth.

Stagflation is situation in economy which is characterized by high inflation and stagnant growth where adopting any policy be it expansionary or contractionary leads to imbalance in economy.