Suppose interest rates in several Asian countries are lowered. Then, the U.S. ec
ID: 1110411 • Letter: S
Question
Suppose interest rates in several Asian countries are lowered. Then, the U.S. economy, which was originally at its long-run steady state, will
a. initially enter into a boom, and inflation will be higher but will eventually return to its original long-run steady state values.
b. initially enter into a recession, and inflation will be lower but will eventually return to its original long-run steady state values.
c. have a new steady state where output is permanently lower and inflation is permanently lower.
d. initially enter into a boom, and inflation will be higher and then will enter into a temporary recession before returning to steady state.
Explanation / Answer
Option a is correct
Lowering of interest rates in several Asian countries would mean comparatively higher rates in the US would attract foreign investment and the US economy would initially enter into a boom (AD curve shifts to the right), and inflation will be higher but will eventually return to its original long-run steady state values.