Assume that the long-run level of output is Y = 1000, which the economy is also at initially in the short-run. Suppose that the consumptionand investment functions are, respectivley,C = 100 + 0.8(Y – T),I = 100 – 2000r,that is, MPC is 0.8. Furthermore, the LM (money market equilibrium) curve isM.P200The government is currently implementing a policyG = 80,Ť = 50,and the central bank (CB) is supplying M = 1000.Expected inflation is n = 0.Continuing from Part 1, due to the uncertainty surrounding the coronavirus, consumers tighten their belts and consumption functionchanges toC = 40 + 0.8(Y – T).Focus only on the economy's short-run responses, that is, when the price level P cannot adjust.Continue to assume that the government does nothing, but now the CB wants to acnieve the nighest possible level of output, Y, withoutsetting negative interest rates.a) The highest possible level of output the CB can achieve isat an interest rate of6.b) The CB must react bymoney supply, toc) Due to the CB's monetary policy, the LM curved) Consumtpion, C, changes toe) Private investment, I, changes to

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Focus only on the economy's short-run responses, that is, when the price level P cannot adjust. Continue to assume that the government does nothing, but now the CB wants to achieve the nighest possible level of output, x, without setting negative interest rates. a) The highest possible level of output the CB can achieve is b) The CB must react by money supply, to c) Due to the CB's monetary policy, the LM curve at an interest rate of

Focus only on the economy's short-run responses, that is, when the price level P cannot adjust. Continue to assume that the government does nothing, but now the CB wants to achieve the nighest possible level of output, x, without setting negative interest rates. a) The highest possible level of output the CB can achieve is b) The CB must react by money supply, to c) Due to the CB's monetary policy, the LM curve at an interest rate of

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Given AD1 and AS1 in Figure 8.3, the Monetary Approach to achieving full employment at an output of $300 billion would be to: AS, P, AS AD AD 100 200 300 400 Real Output (billions of dollars per year) O Increase the discount rate so as to shift AD1 to AD2. Decrease the discount rate so as to shift AD1 to AD2. Do nothing and wait for "natural" market forces to achieve full employment. Decease the money supply. Price Level
(i) Walras’s law is derived from the budget constraints of all the economic agents in the economy. Can Say’s law be similarly derived from budget constraints? Use the relevant constraints and specify the additional assumptions needed for this derivation. Assess the validity of these assumptions.(ii) What are the implications for monetary policy if both Walras’s law and Say’s law are imposed on the IS–LM model? Assess the likely validity of these implications. If they do not seem to be valid, which of these two laws should be discarded? Derive the implications for monetary policy of imposing the remaining law on the IS–LM model.(iii) Do the modern classical or/and new classical schools effectively reinstate Say’s law as one of their component doctrines? Is so, should they state it explicitly? Discuss
(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.
Explain the impact effect of this shock on output, inflation, and the real interest rate. Explain the dynamic response of output, inflation, and interest rates in subsequent periods. Does the economy converge back to the same long-run equilibrium? Explain how the central bank responds to inflation and the importance of the monetary authority following the Taylor principle. How would your answer to (B) change if the shock lasted for several periods (instead of one period) before reverting to zero?
Please complete the statements using the labels provided. Suppose that the Federal Reserve Bank wants to address high levels of unemployment in the economy. To do so, it would likely seek to increase If the Federal Reserve Bank is able to instigate the growth it desires, it will likely come at the cost of increasing Suppose that the Federal Reserve Bank achieves the growth it wants, but also experiences the negative consequences. As a result, it will seek to decrease nto a | , at the risk of leading the economy Answer Bank aggregate supply recession aggregate demand deflation inflation disinflation
B. Consider the following model where the monetary policy will be the only policy variable affecting demand for output. For expositional purposes the income velocity of money is held constant. With these assumptions the aggregate demand for output can be written in logs as: mt + v = Pt+ Yt The above equation is the equation of exchange in logs (equation that addresses the relationship between money and price level, and between money and nominal GDP. The equation tells us that total spending (M x V) is equal to total sales revenue (P x Y)). To complete the model we need to add the aggregate supply equation and a money supply rule. yt = y'+ a(pt - Et-1pt1) (2) mt = Byt-1+Et (3) Given that agents form expectations rationally, find a solution for (i) yt and (ii) pt. Is there any scope in this model for the policy authorities to influence the output through systematic stabilisation policy? Explain your answer.
10 Investment Demand AS AD, (I-40) AD, (I=30) AD, (1=20) $10 20 Investment ($) 30 40 50 Real GDP ($) Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3, labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the goal of the Fed is full-employment output of Q, it should O increase the interest rate from 4 percent to 6 percent. decrease the interest rate from 8 percent to 4 percent. O decrease the interest rate from 8 percent to 6 percent. maintain the interest rate at 4 percent. Interest Rate (%) Price Level
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 the economy begins at full employment. Label this starting point as point "1." Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."
Given the Taylor rule equation below, what should the current Federal Reserve target value be for the fed funds rate (i_ff)? You will need to look up on FRED: 1) current inflation rate, p, and 2) current GDP growth rate, y; you should also assume that: 1) the current real rate of interest, r, is 0.15% (that is, 15/100 of a percent; almost zero!); the targeted inflation rate, p*, is 2%; and the targeted GDP growth rate, y*, is 2.75%
The Fed increased the target rate of the federal funds rate nine times since December 2015 through December 2018. An increase in the targeted rate implies a reduction in the growth rate of the money supply. Use the rational expectations AD-AS model to show and explain how this policy could affect Y, N, W/P, r, and P in the short and long runs. Use two scenarios: a) Firms accurately anticipate the change in P; b) They initially underestimate the change in P. What are the implications for monetary policy of the rational expectations model? Many critics said that the Fed's policy move would reduce economic growth. How can their arguments be countered? Note that the Fed has been very public about announcing its policy decisions since 1994.