Suppose the nominal interest rate is five percent, and the ...

[anshika]

Suppose the nominal interest rate is five percent, and the inflation rate rises from two percent to three percent.
 
  Might an increase in the nominal interest rate to 5.5 percent be consistent with the Taylor Principle? If not, what consequences might ensue?

Question 2

In an open economy, Y = C + I + G + NX. From this we may infer that ________.
 
  A) output is greater in an open economy than in a closed economy
  B) the condition for goods market equilibrium is that S = I + G + NX
  C) net exports can be zero only if the domestic real interest rate is equal to the world real interest rate
  D) if saving is greater than zero, NX cannot be zero
  E) none of the above

[Bsand8]

Answer to Question 1

Yes, it might be. The Taylor Principle requires that the nominal interest rate rise by more than the increase in expected inflation. If expected inflation has not changed, or has increased by less than half a percentage point, then the increase in the nominal interest rate implies an increase in the real interest rate. If expected inflation has increased by more than 0.5, then the real interest rate has declined, which will encourage more spending that might fuel further increases in inflation.

Answer to Question 2

E

[anshika]

Thank you

[Bsand8]

No problemo