Following the price level decrease, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of than the quantity of money ▼ their money holdings. In order to do so, they will interest rates until equilibrium is

Following the price level decrease, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of than the quantity of money ▼ their money holdings. In order to do so, they will interest rates until equilibrium is

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Ophelia has income of M₁ 100 in period 1 and M₂ 20 in period 2. If she chooses to, she can either save or borrow at an interest rate of i = 0.05 (so an interest rate of 5% per period). The rate of price inflation between periods is π = 0 (so a 0% inflation rate) and price of a unit of consumption in each period is normalized to 1 (so p₁ = P2 = = = : 1). Suppose that Ophelia's utility function over intertemporal consumption bundles is U (C₁, C₂) = ln c₁ + In c₂. (Notice that this utility function implies that: (i) Ophelia has diminishing marginal utility of consumption in each period and (ii) Ophelia does not discount the future at all relative to the present.) Which of the following statements accurately describes Ophelia's saving/borrowing decision in the first period? It cannot be determined whether Ophelia saves or borrows in the first period. Ophelia borrows in the first period. Ophelia neither saves nor borrows in the first period. Ophelia saves in the first period.
C = 50 + 0.9 · (Y – T) I = 50 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 500. The money market equilibrium curve-or LM curve-is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 10000 units of money, and expected inflation is zº = 0.05. The long-run aggregate supply (LRAS) is Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the consumption function changes to C' = 50 + 0.8 · (Y – T). 1. Explain how the short-run values of (r, i) are determined before the climate shock. 2. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the climate shock? Explain. 3. Which, if any, of the graphs from Appendix B best depicts the short-run change in output and price due to the climate shock? Explain. 4. Which, if any, of the graphs from Appendix C best…
Suppose that the market interest rate in an economy is 9 percent and a bond promises to pay $735 after one year, $858 two years from now, and finally $1410 three years from now. The equilibrium market price of this bond $2485.25. (Round your response to two decimal places.) If this bond were to sell for $1988 in the market, then it is profitable to buy this bond from investors' perspectives. not to buy
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Suppose the current economy requires $6 million for transactions. The table below shows the interest rate and asset demand. Interest Rate Asset Demand (in millions) 12% $4 10 8 8 12 6 16 4 20 2 24 What is the total asset demand when the interest rate is 6 percent? Multiple Choice $40 million $16 million $22 million $6 million
Q3. Suppose that the money demand function is given by: Md=$Y (.25-i), where $Y is $100. (a) Derive the bond demand function (B) assuming that wealth is $50. (b) Calculate Md and Bd at interest rates of 5% (use .05) and 10% (use .10). SHOW WORK. (c) How does an increase in the interest rate affect the amount of money people are willing to hold, according to your calculations? How does an increase in the interest rate affect the quantity of bonds people are willing to hold? (d) Suppose the supply of money is currently $20.. Show that the equilibrium interest rate is 5% (.05). (e) Suppose the central bank wants the equilibrium interest rate to rise to 15% (.15). At what level should it set monetary policy? SHOW WORK. What kind of monetary policy (expansionary or contractionary) does this imply?
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