4. Policy issues ..Suppose an economy exhibits a large unexpected decrease in productivity growth that lasts for adecade; however, monetary policymakers are slow to recognize that the change is to potential notcurrent-output and they interpret the decrease in output as a recession that leads current output to fallbelow potential output. In this scenario, what likely are the responses from policy makers? What ispossible consequence?

The economies goes through various phases of expansion, and contraction, where the policy makers…

Answered: 4. Policy issues . Suppose an economy…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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53) Which of the following statements about the ripple effects of monetary policy is FALSE? Monetary policy can Select one: a. raise the federal funds rate and shift the aggregate demand curve leftward. raise the federal funds rate, thereby raising the real interest rate and increasing potential GDP. c. raise the federal funds rate, thereby decreasing the quantity of money, raising the real interest rate, and decreasing investment.
This is multiple choice question, Pls solve it quickly !!
8) The Federal Reserve president bumps his head and sets his mind on achieving 2% unemployment using monetary policy. Your country is currently in long-run macro equilibrium with an unemployment rate of 4%. a. To lower unemployment, should the central bank use expansionary or contractionary policy? Expansionary Contractionary b. Illustrate what would happen in the short with a graph. Show the current equilibrium and post policy.
Question 1-5. Answer True, False or Uncertain. Briefly explain your answer. 1. In an international economy of perfectly substitutable currencies, an increase in the stock of one countries money reduces real value of all monies. 2. The negative correlation between inflation and the real interest rate can be explained by the Fisher effect. 3. The rate of return equality holds in the model of illiquidity. 4. The rate of return equality is inconsistent with the observations found in the Equity Premium Puzzle. 5. Cooperative stabilisation can help countries have a fixed exchange rate regime and avoid high inflation.
3. If the economy is at the natural rate of unemployment with the level of real GDP at potential output, what would expansionary fiscal or monetary policy do to the economy? How would the economy be affected in the short run and long run?
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.
3. If the FED can only directly control nominal interest rates, how does the FED influence real interest rates that determine the actual stance of monetary policy?
25. Suppose an economy exhibits a large unexpected decrease in productivity growth that lasts for a decade. However, monetary policymakers are slow to recognize that the change is to potential, not current, output and interpret the decrease in output as a recession that leads current to fall below potential output. In this scenario, policymakers believe that building and incorrectly respond by interest rates, sending the economy into a(n) pressures are gap. a. inflationary; raising; inflationary b. inflationary; reducing; inflationary c. inflationary; raising; recessionary d. recessionary; reducing; inflationary e. Not enough information is given.
2. Suppose that in the U.S., the income velocity of money (V) is constant. Suppose, too, that every year, real GDP grows by 2.5 percent (%ΔY/year = 0.025) and the supply of money grows by 10 percent (%ΔM/year = 0.10). a. According to the Quantity Theory of Money, what would be the growth rate of nominal GDP = P×Y? Hint: %Δ(X×Y)  %ΔX + %ΔY.
4) Why might it be expected that an increase in interest rates will tend to reduce inflation?
For the next 5 questions, assume that the economy starts in equilibrium: -the output is 1 million -the equilibrium price of a one-year, $100 bond is $96 -the money supply is 1 trillion -the price level is 125 What is the interest rate in this economy? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a 4.67% b 4.00% 5.03% d. 4.17%
2. Draw a graph of the AD/AS model and the money market. A stretch of nice weather, combined with increased optimism about the future of the economy, has resulted in the interest rates dropping a bit while output grew. Draw this change in the AD/AS model, and draw how the change in the AD/AS model affects the money market. If the money market is affected the way you described above, what should the Fed do to the money supply to maintain stable prices? Draw in your graph what you think the Fed should do.

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