Real interest rate is equal to marginal product of capital

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Assume that b=1 and that initially the real interest rate is equal to the marginal product of capital at 4%. As well, assume that v=1/2 and that the inflation rate last period was 2%

a. If the housing bubble busting causes the share of output of investment to fall 6% of potential GDP, what will happen to the economy?

b. If the economy was at potential before and the natural rate of unemployment is 5% what will unemployment be now?

c. What will the inflation rate be?

d. How low can the Federal Reserve lower the Real interest rate*? How much output is recovered? Is it enough to push the economy back to potential?

Reference no: EM13839407

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