Q7) At T1, an economy is in long-run equilibrium at a real interest rate of 4%, a price level of 100, and with an expected inflation rate of 0%. If in T2 the actual price level is 95, then in that time period: A) r=4%, i = 4% B) r9%, i -1% C) r= -1%, i 4% Dr= -1%, i 9%

Q7) At T1, an economy is in long-run equilibrium at a real interest rate of 4%, a price level of 100, and with an expected inflation rate of 0%. If in T2 the actual price level is 95, then in that time period: A) r=4%, i = 4% B) r9%, i -1% C) r= -1%, i 4% Dr= -1%, i 9%

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter7: Inflation

Section: Chapter Questions

Problem 14SQ

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Suppose the Central Bank sets 1 year real interest rates by following this Taylor rule: rt = r +0.5(π⁹² − л*) and where r = 4% and л* = 3% - where is the expected inflation rate Nominal interest rates are equal to the real interest rate plus the expected inflation rate it = rt + πe (a) Suppose in period 1 inflation is expected to be 1%. Calculate the 1 year nominal and real interest rates in period t. (b) Calculate the 1 year nominal and real interest rates when inflation is expected to be 5% for the period t+1. (c) (d) (e) Calculate the 1 year nominal and real interest rates when inflation is expected to be 5% for the period t+2. Calculate the nominal 2 year rate and 3 year rates at time t, for the yield curve. What will the yield curve look like and why?
C= 1,600+0.6(Y-7) - 2,000r P=2,500-1,000r G=2,000 NX= 50 T= 2,000 The Bank of Lotusland, the central bank, has announced that it will set the real interest rate according to the policy reaction function found in the table below. Inflation rate, n Real interest rate, r 0.040 0.045 0.050 0.055 0.060 0.00 0.01 0.02 0.03 0.04 a. For each of the rates of inflation given below, find autonomous expenditure and short-run equilibrium output in Lotusland. Instructions: Enter your responses rounded to whole numbers. Inflation rate, n Real interest rate, r 0.040 0.045 0.050 0.055 0.060 0.00 0.01 0.02 0.03 0.04 Autonomous expenditure Equilibrium output Using the data above, graph the AD curve Instructions: in the graph below, use the line tool AD' to draw the aggregate demand line for levels of inflation 4 percent and 0 percent. Draw only the two endpoints.
Suppose that an economy has a constant nominal money supply, a constant level of real output Y = 1500, and a constant real interest rate r = 0.05, and it’s expected rate of inflation is 2%, i.e, πe = .02. Suppose that the income elasticity of money demand is ηY = 0.5 and the interest elasticity of demand ηi = –0.2. (a) Suppose that Y decreases to 1425, r remains constant at 0.05 and there is no change in the expected rate of inflation. What is the percentage change in the equilibrium price level? (b) Suppose that r increases to 0.06 and Y remains at 1500. Assuming that expected inflation remains at πe = .02, what is the percentage change in the equilibrium price level? (c) Suppose that r increases to 0.06. Assuming that πe = .02, what would real output have to be for the equilibrium price level to remain at its initial value?
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Consider an economy producing at Ý, = 0 and ū = 1/4. The inflation rate at t = 0 is To = 3% . Now, suppose the economy is hit by an inflation shock õ1 = ö2 = 3%. The shock is temporary and ōg = 0 for t > 2. For the duration of the inflation shock, the economy is in a recession with Ý1 = Ý2 = -1%, which ends with Ý 3 = 0. Based on this information, you know that the inflation rate 73 i , percent.
Let’s see just how much high expected inflation can hurt incentives to save for the long run. Let’s assume the government takes about one‑third of every extra dollar of nominal interest you earn. You must pay taxes on nominal interest. However, if you are rational, you will care mostly about your real, after‑tax interest rate when deciding how much to save. ?i ??=?Eπ=π 23×?23×i (23×?)−?(23×i)−π Nominal interest rate Inflation (no surprises) Nominal after‑tax return Real after‑tax return 15% 12% 10% -2% 6% 3% 12% 9% 90% 87% 900% 897% Calculate the nominal and real after‑tax return for each case.Nominal interest rate = 6%, inflation = 3% Nominal after‑tax return: % Real after‑tax return: % Nominal interest rate = 12%, inflation = 9% Nominal after‑tax return: % Real after‑tax return: % Nominal interest rate = 90%, inflation = 87% Nominal after‑tax return: %…
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Suppose the money demand function is = 1000 + 0.2Y - 1000 (r + πe). Required (a.) Calculate velocity if Y = 2000, r = 0.06, and πe = 0.04. (b.) If the money supply (Ms) is 2600, what is the price level? (c.) Now suppose the real interest rate rises to 0.11, but Y and Ms are unchanged. What happens to velocity and the price level? (d.) For part (c.), if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?
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