(a) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the central bank conducts an open market sale of government debt, what will be the effect on the price level? Use a diagram, explain your results. (b) Suppose that there is a decrease in the price of housing, which the central bank judges is a temporary asset price decrease. In the New Keynesian model, determine the central bank's optimal response to this asset price increase, using diagrams. (c) Suppose initially that inflation is at the central bank's target and the output gap is zero. Then, government spending goes up. Determine, with the aid of diagrams, how the degree of price stickiness affects the central bank's optimal response and explain your results.

(a) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the central bank conducts an open market sale of government debt, what will be the effect on the price level? Use a diagram, explain your results. (b) Suppose that there is a decrease in the price of housing, which the central bank judges is a temporary asset price decrease. In the New Keynesian model, determine the central bank's optimal response to this asset price increase, using diagrams. (c) Suppose initially that inflation is at the central bank's target and the output gap is zero. Then, government spending goes up. Determine, with the aid of diagrams, how the degree of price stickiness affects the central bank's optimal response and explain your results.

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

The Tax Cuts and Jobs Act of 2017, among other things, lowered marginal tax rates across several tax brackets. During that time, the Federal Reserve raised the target for the federal funds rate. Using the IS-MP model, graphically demonstrate what should happen to the interest rate and income (real GDP) in the short run. Explain in words below your diagram.
Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers increases, but producers are not affected. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point A after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point C after the change d The equilibrium will be at point E before the change in expectations and point C after the change
All of the following will increase Aggregate Demand (AD), except: Foreign income increases Families paying off debt Higher household income The Keynesian model of economics was developed in a response the events of the great depression. For the first time, this model showed that prices and wages were _______ and that ______may decline instead of prices. Flexible; interest rates Flexible; production Sticky; production
(a) Using a basic Keynesian income determination model, describe the effects of the following changes, assuming that money demand is infinitely elastic: (i) an increase in government expenditure (ii) an increase in the marginal propensity to save (iii) a decrease in export demand (iv) an increase in the marginal propensity to import (v) a cut in the official rate of interest by the Monetary Policy Committee of the Bank of England Illustrate your answers with diagrams.
In the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital. Explain your results with the aid of diagrams. Suppose that the central bank keeps the nominal interest rate at its initial value. What will be the effect on current inflation and on output? Suppose that the economy initially faces an increase in anticipated future inflation and a zero output gap. When the shock occurs, what should the central bank do?
Discuss the Lucas Critique of traditional structural Keynesian macroeconomics. Explain why the Euler Equation below is immune to the Lucas critique and explain its main implications for household consumption. u' (C₁) = (1 + 1) E₁u' (C (+1) Ct is consumption at time t and C++1 is consumption in the next period p> 0 is the rate of time discount (degree of impatience) i is the fixed interest rate on a risk free asset Et is the expectation at time t (today)
Between 2007 and 2009, the United States experienced a severe financial crisis and economic downturn commonly known as the Great Recession. Starting in 2006, housing values fell 30%, causing losses in mortgage-backed securities for families and financial institutions. The recession was marked by a drop in aggregate demand that caused a decline in GDP and an increase in unemployment. Attached is an example of an aggregate demand and aggregate supply (AD/AS) model that illustrates the general trends of the U.S. economy during the Great Recession. How did the AD/AS equilibrium change over time? Support your claims by referring to your AD/AS model. Select an economic factor (GDP, unemployment, price level) and explain what impact any shifts in AD or AS (or both) had on your chosen factor. Please tailor the answer according the AD/AS model in layman's terms
Suppose a new government wins an election and announces that once it is inaugurated, it will increase the money supply. Use the DD - AA model to study the economy's response to this announcement.
Consider the following short-run, closed economy model of the economy. Goods Market C = 50 + 0.5(Y – T) I = 150 – 10r ; NX = -200 G = 150 ; T = 100 Money Market M = 20,000 P = 100 L(Y, r) = Y – 50r 1. Find the equilibrium values of r and y. *** This has been answered*** Goods Market = 600 - 20r Money Market = 200 + 50r equilibrium value of r = 5.71; Y = 485.8 2. At the equilibrium in part 1, what is the value of national savings (S = Y – C – G)? Investment? Show the results using a graph for the market of loanable funds. Is that market in equilibrium? Explain.
using economic concepts , discuss the impact of the following events on the equilibriumprice level and output: in an effort to fight inflation , the reserve bank of australia decides to implement contractionary monetary policy.
Consider the following short-run, closed economy model of the economy. Goods Market C = 50 + 0.5(Y – T) I = 150 – 10r ; NX = -200 G = 150 ; T = 100 Money Market M = 20,000 P = 100 L(Y, r) = Y – 50r 1. Find the equilibrium values of r and y. *** This has been answered*** Goods Market = 600 - 20r Money Market = 200 + 50r equilibrium value of r = 5.71; Y = 485.8 2. Assume the natural rate of output is Y̅ = 210, individuals do not hold currency (cr = 0), and the reserve requirement is 10% (rr = 0.1). If the Fed desires to return the economy to its natural level, what should they do with reserves (R) and the money supply (M)? What is the new equilibrium real interest rate?
Consider the following short-run, closed economy model of the economy. Goods Market C = 50 + 0.5(Y – T) I = 150 – 10r ; NX = -200 G = 150 ; T = 100 Money Market M = 20,000 P = 100 L(Y, r) = Y – 50r 1. Find the equilibrium values of r and y. *** This has been answered*** Goods Market = 600 - 20r Money Market = 200 + 50r equilibrium value of r = 5.71; Y = 485.8 Policymakers plan to balance the budget by decreasing G. What is the size of the Keynesian-Cross government spending multiplier and the horizontal shift of the IS curve? What are the resulting IS-LM equilibrium values of r and Y after the shift? What is the size of the effective (actual) government spending multiplier? Why is it smaller?