1- During 2003, we began to stop worrying that inflation was a problem. Instead

Q: 1- During 2003, we began to stop worrying that inflation was a problem. Instead

1. If the money supply is constant, deflation creates interest rate to fall. It happens due to the downward-shifting money demand curve to the left of the original demand curve, causing decrease in demand.

ID: 1195132 • Letter: 1

Question

1- During 2003, we began to stop worrying that inflation was a problem. Instead , we began to worry about deflation, a decline in the price level. Assume that the central bank ( federal reserve ) decided to hold the money supply constant. What impact would deflation have on inserts rate ?

2- why might investment not respond positively to low-interest rates during a recession ? why might investment not respond negatively to high-interest rate during a boom ?

3- Describe the central bank's ( federal reserves's) tendency to " lean against the winsd " Do the central banks policies tend to stabilize or destabilize the economy?

Explanation / Answer

If the money supply is constant, deflation creates interest rate to fall.

It happens due to the downward-shifting money demand curve to the left of the original demand curve, causing decrease in demand.

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1- During 2003, we began to stop worrying that inflation was a problem. Instead

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