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The country of Austland has a central bank entitled the “Central Reserve of Austland’s People” (CRAP for short)
The country of Austland has a central bank entitled the “Central Reserve of Austland’s People” (CRAP for short). Currently CRAP is run by a group of experienced economists who obviously never took ECON1102. If Austland is currently at full employment, using the Keynesian model, illustrate and explain the impact on the economy if CRAP decided to cut the cash rate of interest.
Expert Solution
Answer:
AE increases between potential point, meaning that it will intersect with the Y at a point.
IF the interest rate decreases the PAE curve shifts up to PAE1 with an interest rate of r2 whereby re2 is less than r1.
The economy shifts to Y1 and expansionary gap.
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