Question

Use the 3-equation model diagrams to show how the economy can fall into a deflation trap. Explain, with reference to the diagram, how the central bank/government can intervene to escape the trap. Show the relevant IS curve and re-label the MR as the PR to indicate that fiscal policy is being used. Are there any reasons why these policies might not work? does have an independent central bank, did inflation fall when the central bank gained independence? Propose some reasons why. (d) If the country does not have an independent central bank, have they managed to find other mechanisms to establish a low inflation monetary policy regime? Propose some reasons why.

Answer 1