The Zero Lower Bound: During the pandemic many countries hit the zero lower bound on nominal interest rates (it= 0). In the IS-MP-AS model,
˜
Yt= ¯a−¯b(Rt−¯r)
(Rt−¯r) = ¯m(πt−¯π)
πt=πe+ ¯v˜ Yt+ ¯o
if it=Rt+πeand ¯m= 0 at the zero lower bound, then
a. What does the AD curve look like? Give the equation and explain.
b. If people expect higher inflation, what happens to output?
c. Does the predictions of this model differ from that of the IS/LM model?