Reference no: EM13204604
Suppose that the demand for and supply of bonds both change with the state of the business cycle. In economic expansions, the demand for bonds is given by the equation:
D = 200 + 2,000r
and the supply of bonds is:
S = 500 - 1,000r
where r is the expected real interest rate. In recessions, however, both the demand for and supply of bonds is lower:
D = 150 +2,000r
S = 300 - 1,000r
A - Given these equations, what is the equilibrium expected real interest rate in economic expansions?
B - Given these equations, what is the equilibrium expected real interest rate in recessions?
C - If the expected inflation rate is 4% in economic expansions, what is the equilibrium nominal interest rate in economic expansions?
D - If the expected inflation rate is 2% in recessions, what is the equilibrium nominal interest rate in recessions?
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