Our formulation of monetary policy has thus far assumed that the central bank can set the nominal interest rate in accordance with the outcome determined by the Taylor rule. However, since 2008 many central banks have hit the zero lower bound on nominal inter- est rates, limiting the stimulus they can provide. Consider a modified Taylor rule which obeys

Which of the following best describes the cause-effect chain of an expansionary monetary policy?     A)  A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.   B)  A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.   C)  An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.   D)  An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

State the main features of the monetary model. Use the model to analyse the impact of an expansionary monetary policy.

we make use of the general monetary model here, where L is no longer assumed constant, and money demand is inversely related to the nominal interest rate. Recall from that earlier question inflation rate in Korea is = 10% and inflation rate in Japan is = 0%. In addition, assume that the bank deposits in Japan pay 2% interest rate (i¥ = 2%).   Compute the interest rate paid on South Korean won deposits (iwon).           Using the definition of the real interest rate, show that the real interest rate in South Korea (rwon) is equal to the real interest rate in Japan (r¥)           Suppose the Bank of Korea decreases the money growth rate from 15% to 10% and the inflation rate falls proportionately (one for one) with this decrease. If the nominal interest rate in Japan remains unchanged, what happens to the interest rate paid on Korean won deposits?               Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s…