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II. Consider an economy described by Fig. 6 on page 19 of the Ch.6 slides. a. Suppose the nominal policy interest rate is 5%. If expected inflation decreases from 3% to 2%, in order to keep the LM curve from shifting in Fig. 6, what must the central bank do to the nominal policy rate of interest? b. If the risk premium on risky bonds increases from 5% to 6%, does the LM curve shift? c. If the risk premium on risky bonds increases from 5% to 6%, does the IS curve shift? d. What are the fiscal policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output? e. What are the monetary policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output?

II. Consider an economy described by Fig. 6 on page 19 of the Ch.6 slides. a. Suppose the nominal policy interest rate is 5%. If expected inflation decreases from 3% to 2%, in order to keep the LM curve from shifting in Fig. 6, what must the central bank do to the nominal policy rate of interest? b. If the risk premium on risky bonds increases from 5% to 6%, does the LM curve shift? c. If the risk premium on risky bonds increases from 5% to 6%, does the IS curve shift? d. What are the fiscal policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output? e. What are the monetary policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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II. Consider an economy described by Fig. 6 on page 19 of the Ch.6 slides. a. Suppose the nominal policy interest rate is 5%. If expected inflation decreases from 3% to 2%, in order to keep the LM curve from shifting in Fig. 6, what must the central bank do to the nominal policy rate of interest? b. If the risk premium on risky bonds increases from 5% to 6%, does the LM curve shift? c. If the risk premium on risky bonds increases from 5% to 6%, does the lIS curve shift? d. What are the fiscal policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output? e. What are the monetary policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output?
Transcribed Image Text:II. Consider an economy described by Fig. 6 on page 19 of the Ch.6 slides. a. Suppose the nominal policy interest rate is 5%. If expected inflation decreases from 3% to 2%, in order to keep the LM curve from shifting in Fig. 6, what must the central bank do to the nominal policy rate of interest? b. If the risk premium on risky bonds increases from 5% to 6%, does the LM curve shift? c. If the risk premium on risky bonds increases from 5% to 6%, does the lIS curve shift? d. What are the fiscal policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output? e. What are the monetary policy options that prevent an increase in the risk premium on risky bonds from decreasing the level of output?
Fig.6: Financial Shocks and Monetary Policy Response A sufficient decrease in policy rate can be enough to offset the increase in risk premium and restore initial output. The zero lower bound may however put a limit on the decrease in r. IS IS' A LM Y LM' A" Output, Y Policy rate, r
Transcribed Image Text:Fig.6: Financial Shocks and Monetary Policy Response A sufficient decrease in policy rate can be enough to offset the increase in risk premium and restore initial output. The zero lower bound may however put a limit on the decrease in r. IS IS' A LM Y LM' A" Output, Y Policy rate, r
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