3. (Note: You should wait to tackle this question until after lecture on Thursday, November 19.) Suppose that the economy is initially in long-run equilibrium: output is at potential and, as a result, inflation is steady. Now, suppose there is a permanent upward shift of the Federal Reserve's reaction function. a. What does this upward shift in the reaction function imply about the Fed's long-run target for the rate of inflation? b. What does the change in the reaction function imply that the Fed will do to the nominal interest rate and to the real interest rate in the short run? Describe two things the Fed could do to bring about this change in interest rates. c. What will be the short-run effect of the shift in the reaction function on GDP?

3. (Note: You should wait to tackle this question until after lecture on Thursday, November 19.) Suppose that the economy is initially in long-run equilibrium: output is at potential and, as a result, inflation is steady. Now, suppose there is a permanent upward shift of the Federal Reserve's reaction function. a. What does this upward shift in the reaction function imply about the Fed's long-run target for the rate of inflation? b. What does the change in the reaction function imply that the Fed will do to the nominal interest rate and to the real interest rate in the short run? Describe two things the Fed could do to bring about this change in interest rates. c. What will be the short-run effect of the shift in the reaction function on GDP?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Question 5A Starting from a baseline Long Run Steady State Equilibrium (LRSSE), the federal reserve increases interest rates. i. What kind of policy is this (Monetary or fiscal; ii. iii. expansionary or contractionary? How do you know? As a response which curve will start shifting in which direction? Why? How will this policy make the economy move away from the baseline Long Run Steady State Equilibrium (how would it change unemployment or price level relative to the long run steady state equilibrium )? iv. Draw a graph to show the changes to the long run steady state equilibrium (LRSSE).
5. Critical Analysis Q6 Are the implications of the impact of an unexpected shift to a more expansionary monetary policy different under the rational and adaptive expectations hypotheses in the short run? Yes, because under adaptive expectations, there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the rational expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. Yes, because under rational expectations, there is a significant time lag before people come to expect the inflation and incorporate it into their decision making, whereas the adaptive expectations theory implies that people will begin to anticipate more inflation as soon as they observe a move toward a more expansionary policy. No, because under both theories, there is a significant time lag before people come to expect the inflation and incorporate it into…
28)By using aggregate demand (AD) and aggregate supply (AS) curves, show and explain the effects of an anticipated increase in money supply on macroeconomic equilibrium according to Rational Expectations Hypothesis
Show the short-run effect of a contractionary monetary policy by dragging the point along the short-run Phillips curve (SRPC) or shifting the curve to the appropriate position. (? 12 11 10 SRPC 4 SRPC 2 1 1 2 3 4 5 6 UNEMPLOYMENT (Percent) INFLATION RATE (Percent) 3.
Analyse the impact of these events on the price level and total output of an economy in the short term. If policymakers were to use monetary policy to actively stabilize the economy, in which direction should they move the money supply and interest rate and show the effects of these policies? Please discuss your answers with appropriate graphs. - (a) The government raises taxes and reduces expenditures to balance its budget. (b) Enterprises in the economy are pessimistic about the economy in the future. - (c) Foreigners increase their taste for domestically produced beef. (d) The money wage rate rises.
4. [A Monetary Surprise] Consider an economy in which the demand for money is of the form M₁ = = P₁Y for t = 0, 1,2,..., where output is 150, the money velocity is 1.5. The money supply is 100 for t = 0, 1. In period 2, the central bank surprises people and announce that money supply will grow at 2 percent forever, that is, Mo = 100, M₁ = 100, M₂ = (1.02) M₁, M3 (1.02) M₂, and so on. (a) What is the inflation rate in period 1, 7? What is real money balance in period 1, ? What is the expected inflation in period 2, given the information available in period 1, E172? (b) What is the inflation rate in period 2, m₂? What is real money balance in period 2, 2? What is expected inflation in period 3, given the informa- tion available in period 2, E273? (c) What is the inflation rate in period 3, 73? What is real money balance in period 2, ? (d) Compare E₁₂ and 7₂. B
Question 23 The Fed's Policies under Volcker In the years 1979 to 1982, under the leadership of Paul Volcker, the Fed adopted a tight money policy to reduce the nation's inflation rate. Based on the aggregate supply - aggregate demand model, what would happen to the price level in the long run as a result of the Fed's tight money policy under Volcker's leadership? Choose one answer below: O The price level would end up higher in the long run. The price level would end up lower in the long run. O The price level would end up at its initial level in the long run.
4. Suppose that the President and Congress get legislation passed that encourages investment in research and development of new technologies. Assuming this policy results in a positive and permanent technological change, what does aggregate demand and supply analysis predict in terms of inflation and output? Only consider the self- correcting mechanism of the economy.
135.) In the long run, an increase in the monetary base will cause Higher prices Higher output Lower GDP All of the above
6. Monetary policy in the long run Consider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price level of 100. Suppose the real GDP of this economy grows at an annual rate of 2%. If the velocity of money is constant, the central bank can maintain the price level at 100 by means of which of the following? Expanding the money supply by 2% per year O Reducing the money supply by 2% per year les of O Keeping the money supply constant Suppose the central bank enacts an unanticipated restrictive monetary policy. As a result, the supply of loanable funds leading to a in short-term interest rates. The following graph shows the goods and services market of this economy at full employment. Assume that potential output remains constant. Adjust the graph to show the long-run effect of an unanticipated restrictive monetary policy on the goods and services market by dragging the 511 8/2/ aggregate demand (AD) curve, the short-run aggregate supply (AS) curve, or…
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
5