include graphs/diagrams when necessary 3.Suppose that the economy is well described by the New-Keynesian with partialsticky prices. Assume that the ZLB on nominal interest rate is binding. In your answer below,keep in mind the consumers' and firms' optimal decisions that give rise to the model andexplain how and why agents' decisions change.a) Bank runs generate a large increase in spreads ft in the economy. What are the effects onaggregate outcomes (Y, P, r)? How does it compare to the case where the ZLB is notbinding? Use diagram to support your answerb) The Central bank, as lender of last resort, decides to inject large amounts of money intofinancial institutions. Analyse the transmission mechanism of this policy action as well as itseffects on output and price level.

Evolution of central banking system.Despite the fact that central banks have existed since ancient…

Answered: by the New-Keynesian with partia e is…

by the New-Keynesian with partia e is binding. In your answer belo that give rise to the model and economy. What are the effects a e case where the ZLB is not

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter22: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 12P

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Question

include graphs/diagrams when necessary

3.
Suppose that the economy is well described by the New-Keynesian with partial
sticky prices. Assume that the ZLB on nominal interest rate is binding. In your answer below,
keep in mind the consumers' and firms' optimal decisions that give rise to the model and
explain how and why agents' decisions change.
a) Bank runs generate a large increase in spreads ft in the economy. What are the effects on
aggregate outcomes (Y, P, r)? How does it compare to the case where the ZLB is not
binding? Use diagram to support your answer
b) The Central bank, as lender of last resort, decides to inject large amounts of money into
financial institutions. Analyse the transmission mechanism of this policy action as well as its
effects on output and price level.

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