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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Question 2: Consider a model exactly like that in Question 1 - where the person receives income $48,326 - in period 1 and additional income $44,928 in period 2 except let's now suppose that the person faces a liquidity constraint. Specifically, she can still save at an interest rate of 4%, but if she borrows, then she must pay an interest rate of 8%. (a) If the person wants to save, the relevant interest rate is 4%. For what values of 8 is it optimal to save? [Hint: You already know the answer from Question 1.] (b) If the person wants to borrow, the relevant interest rate is 8%. (i) Suppose the interest rate is 8%, and solve for the optimal c₁ and c₂ as a function of 8. (ii) If the interest rate is 8%, for what values of 8 is it optimal to borrow? [Note: Please report your answer to 5 decimal points.] (c) Given the liquidity constraint, for what values of 8 is it optimal to neither borrow nor save? [Hint: Two conditions must hold: (i) 8 must be such that the person does NOT want to…