C = 100 + 0.5 - (Y – T) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T= 100. The LM (money market equilibrium) curve is Y P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to a = 0.05. 1. Explain how the short-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to the vaccine news shock? Explain. 3. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the vaccine news shock? Explain.

C = 100 + 0.5 - (Y – T) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T= 100. The LM (money market equilibrium) curve is Y P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to a = 0.05. 1. Explain how the short-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to the vaccine news shock? Explain. 3. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the vaccine news shock? Explain.

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

C = 100 + 0.5 · (Y – T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is MY P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. 1. Suppose the government (not the CB) wants to stabilise the shock in the short-run. Explain whether it should increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), and how it works. 2. Now suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run. Explain whether it should decrease or increase money supply M if it wants to bring output Y back to…
The quantity theory of money says that changes in nominal money lead to equivalent changes in the price level and: have an uncertain effect on output and employment. reduce output and employment. have no effect on output and employment. increase output and employment.
(b) Use the IS-LM model to illustrate graphically the final impact of the reduction in government spending on output and interest rates under two possible scenarios: i) The Central Bank holds the money supply constant. ii) The Central Bank holds the level of output constant.
Consider an economy with constant nominal money supply M=100, constant real output Y = 100, and constant real interest rate r = 0.1. Suppose that the income elasticity of money demand is 0.5 and the interest rate elasticity of money demand is -0.1. Also assume that expected inflation is zero and does not change (ne = 0). This implies that the nominal interest rate is equal to the real interest rate. By what percentage does the equilibrium price level differ from its initial value if output increases to Y = 120, money supply doubles but r remains at 0.1? O A. 90% О В. 50% О С. 3% O D. 0.9%
In the IS/LM model, if the Keynesian expenditure multiplier is 2.76, the investment sensitivity to interest rates is 10, the income elasticity of money demand is 0.2 and the interest rate elasticity of money demand is 3, then the monetary policy multiplier with respect to income is 3.2 -0.12 0.12 -3.2
Discuss briefly the liquidity preference theory (LFT) and differentiate it from the loanable funds (classical) model of interest rate determination. Differentiate the equation of demand for real money balances in the Keynesian model based on the LFT from the equation of demand for real money balances in the classical model based on the quantity theory of money, by providing their respective money demand equations.
Suppose the inflation rate is zero, the income elasticity of money demand is 0.75, and the interest elasticity of money demand is -0.25. Determine the inflation rate that results from each of the following events (starting back at zero for each one). Enter all answers as integers with no decimal places. If negative, be sure to include the minus sign before the number (no spaces). i. The nominal money supply increases 10%. The inflation rate is now _% ii. Real income increases 8%. The inflation rate is now _%
An economy has the following money demand function. 0.5 Y where the nominal interest rate is in percentage points. Nominal interest rate is 9 percent. (M/P) d = Suppose the announcement of a new head of the central bank, with a reputation of begin hard on inflation, decreases expected inflation rate by 8 percentage points. What is the new velocity of money? QUESTION 14 If, in the aftermath of the announcement, both the economy's output and the current money supply are unchanged, what happens to the price level? O 1.67 2.67 3.67 O 4.67
Suppose the liquidity preference function is given by: L(i.Y) =-1,000/ Calculate velocity for each period, using the money demand equation: V= LY) along with the following table of values. (Round your responses to two decimal places) Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Y (in billions) 12,100 0.04 12,400 12,500 12,900 12,350 0.03 13,200 0.04 13,300 0.08 Interest rate 0.08 0.05 0.06 Velocity 5.17 5.06
In the IS/LM model, if the Keynesian expenditure multiplier is 2.76, the investment sensitivity to interest rates is 10, the income elasticity of money demand is 0.2 and the interest rate elasticity of money demand is 3, then the monetary policy multiplier with respect to income is O 3.2 O-0.12 O 0.12 O -3.2
Our formulation of monetary policy has thus far assumed that the central bank can set the nominal interest rate in accordance with the outcome determined by the Taylor rule. However, since 2008 many central banks have hit the zero lower bound on nominal inter- est rates, limiting the stimulus they can provide. Consider a modified Taylor rule which obeys = max{0, Tt; + p+07(T; – T) + Oy (Y – Yt)}. The "max" operator means that interest rates will take whichever value is larger, 0 or the value determined by the Taylor rule. Derive the dynamic aggregate demand curve under a normal Taylor rule and when the zero lower bound is binding. Provide some intuition for the differences between them
Why is a public announcement of numerical inflationrate objectives important to the success of an inflationtargeting central bank?