Consider the IS curve in the following graph: Real interest rate (%) 6% 5% 4% 3% 2% 1% 0% -6% -4% -2% 0% 4% to 2% 4% to 3% Suppose the economy is in recession, with an output gap of -2%. To eliminate the output gap, the Federal Reserve might act to move the real interest rate from: 1% to 3% 2% 2% to 4% IS curve 4% 6% Output gap (%)

Consider the IS curve in the following graph: Real interest rate (%) 6% 5% 4% 3% 2% 1% 0% -6% -4% -2% 0% 4% to 2% 4% to 3% Suppose the economy is in recession, with an output gap of -2%. To eliminate the output gap, the Federal Reserve might act to move the real interest rate from: 1% to 3% 2% 2% to 4% IS curve 4% 6% Output gap (%)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. What is the long-term expected real interest rate? How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?
Use the information in the following table to answer the next question. In the table, investment is in billions. (1) Interest Rate (2) Investment (billions of dollars) (3) Investment (billions of dollars) 4% $100 $80 5 90 70 6 80 60 7 70 50 8 60 40 Suppose the Fed increases the interest rate from 5 percent to 6 percent. As a result of this increase in the interest rate, using column (2) investment will Multiple Choice increase by $20 billion. decrease by $10 billion. increase by $10 billion. decrease by $20 billion.
013. [True or False] If money demand becomes more INSENSITIVE to interest rate, the AD curve becomes flatter. Is the statement true or false?
The following set of equations describe an economy: C = 14,400 + 0.5 (Y − T) − 40,000r Ip = 8,000 − 20,000r G = 7,800 NX = 1,800 T = 8,000 Y* = 40,000 Suppose that the real interest rate (r) is 10%. Is the economy in long run equilibrium? If not, what real interest rate should central bank set to restore the economy back to the long run equilibrium? And what methods can central bank use to adjust the interest rate? (Round your answer to 2 decimal places)
Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored (1) (2) Checkable Deposits $20,000 (3) Actual Reserves (4) Required Reserves (5) (6) (7) Reserve Ratio, Money-Creating Potential of Money-Creating Potential Single Bank,-(5) Excess Reserves of Banking System (1) 10 $5,000 $2,000 $3,000 $3,000 $30,000 (2) 20 20,000 5,000 4,000 1,000 1,000 5,000 (3) 25 20,000 5,000 5,000 0 0 (4) 30 20,000 5,000 6,000 -1,000 -1,000 -3.333 a. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? b. What would be the size of the…
Problem 1. Explain in detail what effect a Fed sale of bonds will have on: (1) the LM curve; (2) the IS curve; (3) the general equilibrium of the economy. Effect on LM Curve: Effect on IS Curve: Effect on General Equilibrium of The Economy.
Suppose the government decides to decrease government expenditures as a means of cutting the existing government budget deficit. Using a graph of aggregate demand and supply, show the effects of such a decision on the economy in the short run. Describe the effects on inflation and output. What will be the effect on the real interest rate, the inflation rate, and the output level if the Bank of Canada decides to stabilize the inflation rate?
Question: A recent article (federalreserve.gov/econres/feds/files/2020049pap.pdf) published by the Federal Reserve (the central bank of the USA), suggests "the massive lockdown of the economy" has led to "a large negative demand shock. However, an accompanying increase in unemployment benefits has increased the income of some low-and middle-income households at least temporarily, which could helpfully support aggregate demand". The excerpt above suggests an increase in household income, which might lead to improved aggregate demand. a. Draw a diagram to explain the above situation to show the impact of increased income and how it affects aggregate demand.
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1. Suppose the LM curve is given by (M/P) = d,Y – d̟i . The slope of the LM curve is . If d, is small, i.e. if money demand is. very sensitive) to the level of income, then an increase in income will cause a _(sensitive /not _(small /large) increase in money demand and only a _ (small /large) increase in the interest rate is necessary to restore equilibrium in the money market: the LM curve is relatively _(flat /steep). Similarly, if d, is small, i.e. if the quantity of money demanded is (sensitive /not very sensitive) to the interest rate, then an increase in income will increase money demand and it requires a (small /large) increase in the interest rate to restore equilibrium in the money market: the LM curve is relatively _(flat /steep). 2. For this question, assume that Y = N. Based on our understanding of the labor market model presented in Chapter 6, we know that a reduction in the markup will cause an/a _ (increase, reduction) in the natural level of output. 3. If u ? =?
The real-balances effect refers to the effect that a change in interest rates has on the real value of wealth. True or False True False
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