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Explain why the IS curve is downward sloping in the interest rate-output space.
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- The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 7.0 6.5 6.0 5.5 PRICE LEVEL 4.5 4.0 3.5 3.0 0 Money Demand 0.1 Money Supply 0.3 0.4 0.5 0.6 MONEY (Trillions of dollars) 0.2 0.7 0.8 New MS Curve Suppose the Fed announces that it is lowering its target interest rate by 25 basis points, or 0.25 percentage points. To do this, the Fed will use open- market operations to the money by the public. OUTPUT New Equilibrium Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply…Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) 7 REAL INTEREST RATE 10 8 w 2 50 In 0 6 5 43 N 2 National Saving (Billions of dollars) 55 50 45 40 20 35 30 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. ? Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS Domestic Investment (Billions of dollars) 25 35 80 45 100 55 65 75 Demand -0- Net Capital Outflow (Billions of dollars) -10 -5 Supply + 0 5 Equilibrium 10 15Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) 7 REAL INTEREST RATE 10 2 0 6 0 5 4 3 2 National Saving (Billions of dollars) 45 40 20 35 30 25 20 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Market for Loanable Funds 40 60 QUANTITY OF LOANABLE FUNDS 80 Domestic Investment (Billions of dollars) 30 35 40 45 50 100 55 。 Net Capital Outflow (Billions of dollars) -15 -10 -5 0 Demand Supply + 5 Equilibrium 10
- Why is the relationship between output and the real interest rate called the IS curve?Multiple Choice increase the interest rate from 6 percent to 8 percent. decrease the interest rate from 6 percent to 4 percent. decrease the interest rate from 6 percent to 2 percent. maintain the interest rate at 6 percent.Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock? Use relevant diagrams to answer. (Assume a closed economy unless stated otherwise)
- Given the expected relationship between the real interest rate and investment, how would you explain a scenario where investment continued to fall despite low or even negative real interest rates?What other factors besides interest rates will cause the investment demand curve to shift?When interest rates increase, we expect the supply curve for large durable goods to shift upwards. True False
- Long Question 2 of 2: given by - Consider the short run model of Chapter 13. The IS curve is Ỹ, = ā – b(R, –7) (7) where Y, is the short run output, R, is the real interest rate, ř is the long-run interest rate (or the marginal product of capital). The term ā is the aggregate demand parameter. Also, b captures how responsive investment is to changes in the real interest rate. Moreover, the Phillips curve is given by The = Tt-1 + vY; + ō (8) The term v captures changes in inflation as a response to changes in the current economic conditions, and ō captures shocks in the supply side of the economy. The monetary authority in this economy wishes to keep inflation at a certain "target" level ī. Whenever there is discrepancy between current inflation and target inflation, the central bank responds by changing the interest rate according to the rule Rt -ř = m(T; – ñī) (9) where m is a positive parameter (i.e., ñ > 0) that captures how aggressive the monetary policy is. 1 1 of 5) Derive the…3. Changes in the money supply The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. 5.5 5.0 New MS Curve Money Demand 4.5 4.0 New Equilibrium 3.5 3.0 2.5 2.0 Money Supply 1.5 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 MONEY (Trillions of dollars) Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage point. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point…3. Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate (Percent) 7 National Saving (Billions of dollars) 55 Domestic Investment (Billions of dollars) Net Capital Outflow (Billions of dollars) 30 -15 6 50 40 -10 5 45 50 -5 4 40 60 0 3 35 70 5 2 30 80 10 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Market for Loanable Funds 10 O Demand 8 O Supply *+ Equilibrium 20 40 80 60 QUANTITY OF LOANABLE FUNDS REAL INTEREST…
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