The Limits of Long-Run Monetary Policy
A finance minister argues that the central bank should permanently lower the real interest rate to stimulate investment and achieve a permanently higher level of economic output. From the perspective of supply-side equilibrium, explain why this policy is unsustainable in the long run and what its likely consequence for inflation would be.
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Introduction to Macroeconomics Course
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
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Central Bank's Short-Run Control over the Real Interest Rate
A central bank governor makes the following statement: "To ensure robust long-term prosperity, our new permanent policy will be to hold the real interest rate at 0.5%, which is significantly below the rate that has historically balanced our economy. This will guarantee higher investment and output indefinitely." Assuming the underlying productive capacity (the supply side) of the economy does not change, what is the most significant flaw in this plan?
Long-Run Monetary Policy Consequences
The Limits of Long-Run Monetary Policy
In the long run, a central bank can permanently stimulate economic output above its equilibrium level by consistently setting its policy rate to maintain a real interest rate below the level required for supply-side equilibrium.