Suppose a country is experiencing a deflation while real GDP is below potential GDP.
(A)If the country's central bank decides it wants to reinflate the economy, what type of policy should it pursue?
(B)Suppose this policy is enacted. What will happen to the real interest rate and investment when the economy returns to potential?
(C)Suppose the central bank decides not to reinflate the economy, and the economy eventually returns to potential GDP. How will the long-run equilibrium values for the real interest rate and investment differ from your answer in (B)?

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The Answer of Suppose a country is experiencing a deflation while real GDP is below potential GDP.
(A)If the country's central bank decides it wants to reinflate the economy, what type of policy should it pursue?
(B)Suppose this policy is enacted. What will happen to the real interest rate and investment when the economy returns to potential?
(C)Suppose the central bank decides not to reinflate the economy, and the economy eventually returns to potential GDP. How will the long-run equilibrium values for the real interest rate and investment differ from your answer in (B)?

Suppose a Country Is Experiencing a Deflation While Real GDP