Economy is initially in long-run equilibrium

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Question

Suppose that the economy is initially in long-run equilibrium with π = π* and not on the zero-lower-bound. Now suppose there is a permanent backward shift of the IS curve such that when π = π*, the IS and MP curves intersect on the flat part of the MP curve (on the zero-lower-bound). Assume also that the behavior of inflation is described by our assumptions for the case of anchored expectations.

Reference no: EM133637603

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