3. Consider an alternative way of conducting monetary policy. Suppose that the cen- tral bank adopts a policy rule aiming at dampening fluctuations in aggregate economic activity. The policy takes the following form: i = io + iįY (IDD

3. Consider an alternative way of conducting monetary policy. Suppose that the cen- tral bank adopts a policy rule aiming at dampening fluctuations in aggregate economic activity. The policy takes the following form: i = io + iįY (IDD

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter24: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 5CQQ

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16. Use the IS-LM-PC model to answer the following questions. In Japan, suppose there is a simultaneous increase in taxes and increase in the money supply. Explain what kind of open market operations the Bank of Japan could use to increase the money supply? Graphi- cally explain what short-run eﬀect this particular policy mix will have on output and the interest rate. In addition, graphically explain what the resulting medium-run eﬀect this policy mix will have on output, interest rate, and inflation rate
Y5
(1) Suppose that the demand for real money balances depends on the interest rate, r, and on disposable income Y - T; in other words, suppose that the correct way to write the LM equation is M/PL(r,Y-T). With this change to the IS- LM model, can you tell whether a tax cut increases or decreases output in a closed economy? Illustrate graphically the short-run effects on interest rate and output. Be sure to label: i) the axes, ii) the curves, iii) the initial equilibrium values; iv) the direction the curves shift; and v) the terminal equilibrium values.
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Calculate the equilibrium interest rate.
Question 4. Suppose that the bank of Canada uses money to buy bonds in financial markets during a recession. a. Use the theory of liquidity preference to graphically illustrate the impact of this purchase of bonds in open markets by the bank of Canada on the equilibrium interest rate in the market for real money balances. Be sure to label: į. the axes; ii. the curves; i. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values. Explain what happens to the equilibrium interest rate. b. How would this policy change affect nominal interest rates in the short run and the long run? Explain your answer using macroeconomic models that we studied in the past semester.
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Given the following data about the monetary sector of the economy : = 0.4Y- 80 i Ms = 1200 crores. where M,is demand for money, Y is level of income, i is rate of interest and M_is the supply of money 1. Derive the equation for LM function 2. Give the economic interpretation of the LM curve. Draw LM curve from the above data
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What are the three motives for the demand for money in the Theory of Liquidity Preference? List them and give a brief description of each. Now, combine the three motives into a single equation for the demand for money, using the linear equation we focused on in this class. State the equation and explain in words each of the components of the equation. Lastly, is this equation “stable”, meaning in this context that the money function, once drawn, seldom changes? If so, is monetary policy to keep interest rates near a chosen target easy or hard. If not, if money demand is unstable, what does that mean for the ability of the Fed to stabilize interest rates near a chosen target?
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