By using graphs, show and explain each of the following events as either leading to an increase or a decrease in the equilibrium interest rate? d)A sale of government securities by the TCMB f)An increase in the discount rate e)decrease in the level of aggregate output
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By using graphs, show and explain each of the following events as either leading to an increase or a decrease in the equilibrium interest rate?
d)A sale of government securities by the TCMB
f)An increase in the discount rate
e)decrease in the level of
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Solved in 3 steps with 3 images
- Problem 1 Suppose the system of aggregate expenditures can be described by the following relationships and parameter values. С (Y — Т) — 1200+ 0.8(Y — Т) I(r) = 100 – 3r G = 200 ; T = 200; r = 5; Ex = Im = 0 1. Suppose in response to the fall in Y, the Federal Reserve pursues a strategy to lower the real interest rate to 2 (note that it was 5 in the original setup to the problem). Identify two specific strategies or monetary policies the fed could employ to accomplish this new interest rate target.Similar to how the quantity demanded for a good depends on its price, the quantity of money demanded depends on the cost of holding money, or the nominal interest rate (i). In addition to this, the demand for real money balances is also a function of income (Y). Using all of this information, suppose the demand for real money balances takes on the following functional form: (M/P)dd=500 + 2Y – 9i The Fisher equation relates the nominal interest rate to the real interest rate (r) and the expected rate of inflation (Eπ) when examining ex-ante (based on forecasts or 'before the event') effects. The equation ( (M/P)dd = 500 + 2Y – 9(Eπ – r)/(M/P)dd = 500 + 2Y – 9(r – Eπ) / (M/P)dd = 500 + 2Y + 9(r + Eπ) / (M/P)dd = 500 + 2Y – 9(r + Eπ) ) is equivalent to the function given for the demand for real money balances. Suppose the central bank announces that it will increase the money supply in the future, but it does not change the money supply today. Complete the following…3-) Consider an economy with the following economic functions; cd=1000+ 0.45Y - 45000r - 0.5G Id = 500 22500r Md -0.5Y - 3000 P And other variables are ² = 0.04, G=250, Y = 500, and M = 4200. a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level. b) Suppose the money supply increases to 8400. Find the equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged)
- Consider an economy that is characterized by the following equations: C = 150 + 0.65(Y - T) – 200r (Consumption) (Тахation) (Investment Demand) (Government Expenditure) (Exports) (Imports) T = 100 + 0.2Y I = 200 G = 500 - 200r X = 100 IM = 150 + 0.1(Y – T) – 100r (Money Demand) (Money Supply) L = -25 + 0.5Y - 500r M = 133,200 pSR = 120 (Short-Run Price Level) Answer each of the following questions. In your answers, be sure to state any assumptions that you impose and provide an explanation. Derive the AD and SRAS curves. Solve for the short-run equilibrium in the AD-SRAS model. Is your solution the same as in part 3 above? Why or why not? Is the fiscal multiplier in this economy larger or smaller than if the asset market were not accounted for in the model? Briefly explain. True or false? The aggregate demand curve is downward-sloping because the demand for goods and services increases as the price decreases. Briefly explain.Can you explain me the answer to section a) please?When the housing bubble burst in 2007, home prices fell and this eliminated a large fraction of many households’ home equity. The most likely outcome of this large decrease in the value of households’ assets is: a rightward shift in the aggregate demand curve a rightward shift in the aggregate supply curve a leftward shift in the aggregate demand curve a leftward shift in the aggregate supply curve
- Which of the following are likely to increase investment and as a result, aggregate demand? A) falling real interest rates B) rising real interest rates C) increased business taxesWhat effects would each of the following have on aggregate demand or aggregate supply? Justify your answer. In each case use a diagram to show the expected effects on the equilibrium price level and real output level in the economy. Assume that all other things remain constant and prices are inflexible downward. (a) A reduction in interest rates at each price level (b) A sizable increase in labor productivity. (c) The nation’s currency appreciates against its major trading partners .Suppose that the White House decides to sharply reduce military spending without increasing government spending in other areas. a) Comment on the effect of this measure on aggregate demand. b) Show your answer graphically.
- 2Suppose you are given the following information about an economy: Short run Aggregate Supply: SRAS = Y = 5000r+ 14,400 Long run Aggregate Supply: Aggregate Demand: Investment Spending: Consumption Spending: Government Spending: Net Exports (eX – iM): LRAS = Y* = 25,000 AD = Y=C+I+G+NX_ I = 4000 – 250r C = 1000 +0.75(Y – T) G = 2000 NX = 500 Taxes – Transfers: T = 2400 Monetary Policy: Money Demand: Money Market equilibrium: Fisher equation: where i is the nominal interest rate (i.e. when the interest rate is 7%, it means i= 7) r = 2 n м 3 20,000- 2000i M$ = MD i = r+T e. Find the short run equilibrium level of real GDP (Y), and inflation rate (t), in the short run. What is the output gap in the economy? Is it an expansionary or recessionary gap?Suppose that the production function for the economy is given by: Y = AL/3K/3 Suppose that this economy has 1,000 units of Labour, and 125 units of capital, and TFP (A) is equal to 10. The Short-Run Aggregate Supply Curve (AS) here is given by: Y = 5p And when we consider the AEF at a price level of $1,400, the main components of it (C, I, & G) are given by (we are assuming a closed economy NX = 0): C = 300 + 0.8Y I = 300 G = 200 1. What is potential GDP in this question (Y*)? Show your work. Suppose also that for any $10 decrease in price, desired consumption will increase by $5. 2. Write down the equation for the Aggregate Demand Curve (AD) in the form of Y = a + bp. Show your work. 3. What is the current Short-Run Equilibrium value for Real GDP (Y) and the price level (p)? Show your work. 4. Draw the AD, AS, and LRAS curves. Label all x-intercepts and y-intercepts. Are we currently in an Inflationary Gap, Recessionary Gap, or in Long-Run Equilibrium? How do you know?
