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Question 1052 monetary policy, equilibrium real interest rate, marginal propensity to consume, gross domestic product, bond pricing

In the below chart by Rachel and Summers (2019), the red dotted line depicts the decline in advanced economies’ (AE) equilibrium real interest rate (R*) in percentage points since the 1970’s. The authors attribute this to the factors represented by columns above and below the x-axis. The sum of these columns is given by the black line labelled 'Total response of R* in the GE (general equilibrium) models'.

2019Rachel,Summers On secular stagnation in the industrialised world figure 11

Which of the below statements about this graph is NOT correct?

(a) More government fiscal deficits lead to increased government demand for bonds, pushing prices higher and yields lower.

(b) More government-provided social security (mostly pensions) and old-age health care makes people less likely to save for their own retirement and health care, resulting in less demand for deposit and bond assets, pushing prices lower and yields higher.

(c) Lower long term (GDP and productivity) growth expectations leads people to think that saving and investing will yield lower returns than in the past, therefore they’ll need to save more to sustain themselves through retirement, resulting in more demand for debt assets, pushing prices higher and yields lower.

(d) Higher inequality leads to higher marginal propensities to save since rich people save rather than consume a higher proportion of their income, resulting in more demand for debt assets, pushing prices higher and yields lower.

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