2.
True or False. Explain your answers.
a.
Imagine an economy that has suffered an exogenous drop in aggregate expenditures. It is stuck at a
low level of income at the ZLB. One way to stimulate the economy back the original level of income
might be for the Fed to convince people that inflation will increase. (Hint: Think of this as an
extension of the last question in the last homework assignment: The coronavirus has caused a fall in
consumption. Now, however, we are at the ZLB so the Fed can no longer lower real interest rates, and
we are stuck in a deep recession. Depict and explain what would happen if the Fed could somehow
raise expectations of inflation -- in other words making $\pi^e$ increase).
b. Suppose that antitrust laws are enforced less stringently, so that market concentration increases in the
aggregate: In other words, the markup $m$ in our model increases. True or false: the natural rate of
unemployment will increase and real wages will increase.
