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What is the real interest rate that the central bank sets in equilibrium, and what is the real interest rate that the central bank would like to set if there was no zero lower bound constraint?

Look at Figure IV-3 from the Romer handout. Draw an IS-MP diagram for the IS curve and the MP(π1) curve from that figure. To help draw your figure, assume that inflation expectations πe = π1 > 0, and assume that the IS and MP curves intersect at a real interest rate that is above 0. What is the real interest rate that the central bank sets in equilibrium, and what is the real interest rate that the central bank would like to set if there was no zero lower bound constraint? Label these points in your figure and briefly explain your answer (i.e., why are these points the same or not the same?).

b) Look at Figure IV-4 from the Romer handout. Draw an IS-MP diagram for the IS curve and the MP(π2) curve from that figure. To help draw your figure, assume that inflation expectations πe = π2 > 0, and assume that the IS and MP curves intersect at a real interest rate that is below 0. What is the real interest rate that the central bank sets in equilibrium, and what is the real interest rate that the central bank would like to set if there was no zero lower bound constraint? Label these points in your figure and briefly explain your answer.

c) Look at Figure IV-5 from the Romer handout. Draw an IS-MP diagram for the IS curve and the MP(π3) curve from that figure. To help draw your figure, assume that inflation expectations πe = π3 > 0, and assume that the IS and MP curves intersect at a real interest rate that is below 0. What is the real interest rate that the central bank sets in equilibrium, and what is the real interest rate that the central bank would like to set if there was no zero lower bound constraint? Label these points in your figure and briefly explain your answer.


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