consider the economy of nippon which is operating at the zero lower bound for the nominal interest rate. there is a large government deficit and the economy is at the potential output in period t. a newly elected government vows to cut spending and reduces the deficit in the subsequent periods. the is-lm-pc model for this economy is given by:

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25-10-2022
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consider the economy of nippon which is operating at the zero lower bound for the nominal interest rate. there is a large government deficit and the economy is at the potential output in period t. a newly elected government vows to cut spending and reduces the deficit in the subsequent periods. the is-lm-pc model for this economy is given by:

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akankshasharma92 akankshasharma92 · Answer 1 · 2022-11-05T03:47:14-04:00

The zero lower bound describes the restriction on nominal interest rates' ability to decline below zero. When it reaches zero and is combined with deflation,

it creates a liquidity trap, which prevents additional loans to banks since individuals are hoarding their money as a result of deflation.

What is Zero lower bound?

When the economy needs a boost, a central bank can use the zero-bound tool, which lowers short-term interest rates to zero. A central bank that is compelled to implement this policy must also use other, frequently unconventional, simulative measures to revive the economy.

The lowest point rates can be lowered to before they can no longer be done is the zero-bound. When the economy reaches this point and is still performing poorly, the central bank is no longer able to stimulate the economy by raising interest rates. The liquidity trap is the term economists use to describe this situation.

To know more about liquidity refer:

https://brainly.com/question/29024434

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