In 2009, the U.S. economy was in a severe recession. The Federal
Reserve had lowered the federal funds rate to about 0 percent, but
still wanted to stimulate the economy more. The inflation rate in
2009 was about –1%, but households’ and businesses’ inflation
expectations for the upcoming year were higher and positive, about
1.5%.
a) First, do households’ and businesses’ investment demand
depend on the ex ante or ex post real interest rate? Briefly
explain why.
b) Draw an...