Business, 18.08.2020 18:01 mya1318

How does the policy rate hitting a floor of zero lead to an upward sloping aggregate demand curve? a. When the policy rate hits a floor of the zero, the positive relationship between inflation and the real interest rate embodied by the MP curve becomes negative, and this reversal results in higher inflation producing a higher real interest rate, and hence lower plannedspending, i. e., an upward sloping AD curve.

b. When the policy rate hits a floor of the zero, the negative relationship between planned spending and the real interest rate embodied by the IS curve becomes positive, and this reversal results in lower inflation producing a lower real interest rate, and hence lower planned spending, i. e., an upward sloping AD curve.

c. When the policy rate hits a floor of the zero, the positive relationship between inflation and the real interest rate embodied by the MP curve becomes negative, and this reversal results in lower inflation producing a higher real interest rate, and hence lower plannedspending, i. e., an upward sloping AD curve.

d. When the policy rate hits a floor of the zero, the negative relationship between inflation and the real interest rate embodied by the MP curve becomes positive, and this reversal results in lower inflation producing a higher real interest rate, and hence lower plannedspending, i. e., an upward sloping AD curve.

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