(i) Draw a Mundell-Fleming model labelling all curves and axis. Make sure you include the full employment level of output and the world interest rate (ii) Why does the IS curve slope down? (use intuition or maths) (iii) Why does the LM curve slope up? (use intuition or maths) (iv) For a monetary expansion under a floating rate (and ignoring the effects of the output gap on prices for now), explain carefully why the LM curve shifts right, and then the IS curve shifts right (v) What is the output gap and why is it important for macroeconomic management? (vi) Once the output gap effects have taken place, describe the path back to equilibrium for a monetary expansion under a floating rate (in (iv)) and outline the meaning of money neutrality. (vii) In contemporary monetary theory, we do not normally think of using a money stock to implement monetary policy. By setting m-p, the log of the real money stock, equal to money demand y-b.i where y and i are In(GDP) and the interest rate, create a money policy reaction function. (viii) Noting that p+y is the log of nominal GDP how could you interpret m in this case so as to make your equation approximate the reality in Australia? (ix) How is this different to the way monetary policy is actually implemented (you may assume that monetary policy follows something like a Taylor rule https://en.wikipedia.org/wiki/Taylor_rule#As_an_equation )? (x) Does a fixed or floating exchange rate shield an economy from volatility in GDP better if the shocks come from the IS curve.
(i) Draw a Mundell-Fleming model labelling all curves and axis. Make sure you include the full employment level of output and the world interest rate (ii) Why does the IS curve slope down? (use intuition or maths) (iii) Why does the LM curve slope up? (use intuition or maths) (iv) For a monetary expansion under a floating rate (and ignoring the effects of the output gap on prices for now), explain carefully why the LM curve shifts right, and then the IS curve shifts right (v) What is the output gap and why is it important for macroeconomic management? (vi) Once the output gap effects have taken place, describe the path back to equilibrium for a monetary expansion under a floating rate (in (iv)) and outline the meaning of money neutrality. (vii) In contemporary monetary theory, we do not normally think of using a money stock to implement monetary policy. By setting m-p, the log of the real money stock, equal to money demand y-b.i where y and i are In(GDP) and the interest rate, create a money policy reaction function. (viii) Noting that p+y is the log of nominal GDP how could you interpret m in this case so as to make your equation approximate the reality in Australia? (ix) How is this different to the way monetary policy is actually implemented (you may assume that monetary policy follows something like a Taylor rule https://en.wikipedia.org/wiki/Taylor_rule#As_an_equation )? (x) Does a fixed or floating exchange rate shield an economy from volatility in GDP better if the shocks come from the IS curve.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Hi can you please help with explanations and calculations for parts vii to x?
Transcribed Image Text:(i) Draw a Mundell-Fleming model labelling all curves and axis. Make sure you include the full
employment level of output and the world interest rate
(ii) Why does the IS curve slope down? (use intuition or maths)
(iii) Why does the LM curve slope up? (use intuition or maths)
(iv) For a monetary expansion under a floating rate (and ignoring the effects of the output gap on prices
for now), explain carefully why the LM curve shifts right, and then the IS curve shifts right
(v) What is the output gap and why is it important for macroeconomic management?
(vi) Once the output gap effects have taken place, describe the path back to equilibrium for a monetary
expansion under a floating rate (in (iv)) and outline the meaning of money neutrality.
(vii) In contemporary monetary theory, we do not normally think of using a money stock to implement
monetary policy. By setting m-p, the log of the real money stock, equal to money demand y-b.i
where y and i are In(GDP) and the interest rate, create a money policy reaction function.
(viii) Noting that p+y is the log of nominal GDP how could you interpret m in this case so as to make your
equation approximate the reality in Australia?
(ix) How is this different to the way monetary policy is actually implemented (you may assume that
monetary policy follows something like a Taylor rule
https://en.wikipedia.org/wiki/Taylor_rule#As_an equation )?
(x) Does a fixed or floating exchange rate shield an economy from volatility in GDP better if the shocks
come from the IS curve.
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