7. Suppose that countries are in a global recession and the expected inflation rate of country A is positive, while that of country B is negative. If the Central Banks

7. Suppose that countries are in a global recession and the expected inflation rate of
country A is positive, while that of country B is negative. If the Central Banks of both
countries decide to decrease interest rates to zero (ZIRP: zero interest rate policy) what
would be the consequences? Which one might go into the deflation spiral and what do
you suggest for this country? Should it decrease to policy rate to negative? Why? Use
the Fisher Equation. (10)

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