21 Good job!
Given ZIRP, when prices rise ( positive inflation rate), the real interest rate falls, and thus can
be less than zero, and can help stimulate aggregate demand (cost of borrowing in real terms is
lower). The nominal rate of interest is zero bound (traditionally) but not the real rate of interest.
Some extra inflation will help stimulate the economy given ZIRP because nominal rates of
interest (if zero), given some additional price inflation, will lead to a more negative real rate of
interest.
10
yes
6
5
Comparative advantage is a normative argument (what a country should do). Evidence suggests that world trade patterns conform more to the principle
of absolute advantage, also known as competitive advantage. [Added, but not required explanation]: This is partly because Ricardo’s comparative
advantage assumes a nation-state level of analysis, whereby the world of trade is dominated by large business firms (micro level) who innovate and
compete by selling goods at cheaper prices. If company A is better at producing good X and company B is better at producing good Y (and both firms
are in the same country), they would export these goods respectively, not move to produce the comparatively cheaper good in terms of the opportunity
costs criterion. In short, as indicated in class, actual global trade is ruled by absolute advantage, not comparative advantage.