4. [A Monetary Surprise] Consider an economy in which the demand for moneyis of the formM₁ = = P₁Yfor t = 0, 1,2,..., where output is 150, the money velocity is 1.5. The moneysupply is 100 for t = 0, 1. In period 2, the central bank surprises people andannounce 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 balancein period 1, ? What is the expected inflation in period 2, given theinformation available in period 1, E172?(b) What is the inflation rate in period 2, m₂? What is real money balance inperiod 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 inperiod 2, ?(d) Compare E₁₂ and 7₂.B

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, M₁100, M₂ 100, M₂ (1.02) M₁, M3 (1.02) M₂, and so on. 1 (a) What is the inflation rate in period 1, ₁? What is real money balance in period 1, ? What is the expected inflation in period 2, given the information available in period 1, E12? (b) What is the inflation rate in period 2, ₂? What is real money balance in period 2, M2? What is expected inflation in period 3, given the informa- tion available in period 2, E₂3? (c) What is the inflation rate in period 3, 73? What is real money balance in period 2, ? (d) Compare E₁₂ and ₂.

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, M₁100, M₂ 100, M₂ (1.02) M₁, M3 (1.02) M₂, and so on. 1 (a) What is the inflation rate in period 1, ₁? What is real money balance in period 1, ? What is the expected inflation in period 2, given the information available in period 1, E12? (b) What is the inflation rate in period 2, ₂? What is real money balance in period 2, M2? What is expected inflation in period 3, given the informa- tion available in period 2, E₂3? (c) What is the inflation rate in period 3, 73? What is real money balance in period 2, ? (d) Compare E₁₂ and ₂.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4. A common rule used for describing the conduct of monetary policy is the Taylor π = r + 0.5 (²-³) + 0.5(π — ñ), where r is the real rate of rule, given by i interest and it is a target rate of inflation. Assume that the real interest rate at full employment to be constant at 2%. Assume also that the same 2% represents target inflation. a. What is the nominal interest rate i when inflation and output are at their equilibrium target level? b. Suppose that the central bank observes a rate of inflation of 4%. With all other variables at the same level. What is the nominal interest rate the central bank would target according to the Taylor rule?
Consider again the economy with a total money supply of $2 million and nominal GDP of $6 million. In this economy, the money supply is growing at a rate of 3 percent per year, prices are falling at a rate of 1 percent, and velocity is constant. This economy's real output is growing at a rate of _________ percent. (Enter your answer "as a percent, but without a percentage sign." In other words, if you think output is growing at a rate of 99.99%, enter only 99.99 in the blank. Use a positive sign to indicate an increase and a negative sign to indicate a decrease.)
8. Macroeconomic factors that influence interest rate levels Apart from risk components, several macroeconomic factors—such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity—influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: Statements True False When the Fed increases the money supply, short-term interest rates tend to decline. Actions that lower short-term interest rates will always lower long-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve’s ability to use monetary policy to control economic activity in the United States is limited because US interest rates are highly dependent on interest rates in other parts of the world.
1) Assume that the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its full-employment value of 10,000, and the price level is 2. a) Determine the real and the nominal demand for money. b) The government fixes the nominal money supply in this same economy at 5,000. With output fixed at its full-employment level and assuming that prices are flexible, what will be the new price level? What happens to the price level if the nominal money supply rises to 6000?
Suppose that the Federal Reserve conducts an open market sale. This is considered monetary policy. In response, the size of the monetary base and the size of the money supply O contractionary; grows; grows by more expansionary: grows; grows by more contractionary; shrinks; shrinks by less O contractionary; shrinks; shrinks by more O expansionary; grows; grows by less
5. Consider the Taylor rule: r = (81)[ri-1]+($₂)[r" + a₂Y+ a(-)]. Assume target inflation at 2% and natural rate of interest at 1.8%. (a) If output gap increase by 1.5% and actual inflation to 4%, how much will be the interest rate increase from 2% if the central bank gives twice more weight to output gap as compared to inflation targeting weight of 0.5? Assume sy = $20.5. [Write the Taylor rule first and then compute] Which component of this Taylor rule captures smoothness of interest rate changes? and How?
Can you solve for d) please and thanks
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…
Again, consider an economy with real output of 400 and an average price level of $2. While velocity and the price level are constant, this economy's real output is increasing by 1.25 percent per year. Recall also that the average dollar in this economy is spent 10 times over a year, Calculate the percentage change in the money supply this economy is experiencing. Enter your answer "as a percent, but without the percentage sign." Show an increase in the money supply with a positive number (no sign) and a decrease with a negative number (with negative sign). For example, if the money supply is falling by 99 percent, enter only -99 in the blank.
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If the money supply is $60 billion, the velocity of money is 7, and real GDP is $280 billion, then the price level equals: O 0.67. A.1.50. B.4.67. C.28. D. 1.25. E. 2.5