QI Consider an economy where the impact of monetary policy can be summarised by the relation: Y = BM, where Y, M, B are output, the money supply and the monetary policy multiplier, respectively. It is not possible to adjust M to consistently hit an output target, say Y", perfectly. This inability to hit the target generates the loss function, L (a function that describes the extent to which a target is missed): L=(Y - Y*)*. Let Y* = 3. Compute the choice of money supply M to minimise the above loss function when we are uncertain about the monetary policy multiplier. Specifically, ß can be either 0.5 or 1.5, with a 50% chance of it being either value.

QI Consider an economy where the impact of monetary policy can be summarised by the relation: Y = BM, where Y, M, B are output, the money supply and the monetary policy multiplier, respectively. It is not possible to adjust M to consistently hit an output target, say Y", perfectly. This inability to hit the target generates the loss function, L (a function that describes the extent to which a target is missed): L=(Y - Y). Let Y* = 3. Compute the choice of money supply M to minimise the above loss function when we are uncertain about the monetary policy multiplier. Specifically, ß can be either 0.5 or 1.5, with a 50% chance of it being either value.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

The commodity market for a simple two-sector economy is in equilibrium when Y = C + I. The money market is in equilibrium when the supply of money (Ms) equals the demand for money (Md), which in turn is composed of the transaction-precautionary demand for money (Mt) and the speculative demand for money (Mz). Assume a two-sector economy where C = 5 + 0.8Y, I = 100 - 75i, Ms = 250, Mt= 0.3Y, and Mz = 50 - 150i. , find the IS and LM and equliprium in commodity and money markets. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Suppose that economy of Portugal is characterized by the following C = 200 + 0.5 (Y - T) Represents the consumption function I = 600 – 30 r represents the investment function G = 300 represents the public spendingT = 300 represents the level of taxation (m/p)d = y - 40 r represents the money demand function (m/p)s = 1500 r represents the real money supply d Y represents the global output Find the IS curve the LM curve and deduce the equilibrium level of interest rate equilibrium level of income. The government increases the money supply by 100. How does it affect the equilibrium level of income? Justify your answer. Calculate the new equilibrium... Equilibrium level of income
“Autonomous monetary policy is more effective at changing output when lambda is higher.” Is this statement true, false, or uncertain? Explain your answer.
How does restrictive monetary policy affect the level of investment and consumption? Explain your answer by using the IS/LM model
Consider a fall in the money supply and the impact that this will have on equilibrium in the goods market via both transmission mechanisms. Which of the following would lead to the biggest change in national income following this fall in the money supply? (a) An investment demand curve that is unresponsive to interest rate changes and an elastic liquidity preference curve. (b) An elastic investment demand curve and a high level of responsiveness from export and import demand following a change in the exchange rate. (c) A lack of responsiveness of the exchange rate to interest rate changes and an endogenous money supply. (d) A low level of responsiveness from export and import demand to a change in interest rates and an exogenous money supply curve.
Question #3: Consider an economy described by the following set of values: C = $3.25 trillion mpc = 075 1 = $1.2 trillion d = 0.30 G = $3.5 trillion T = $3 trillion NX = $1.5 trillion f=1 What is the expression for the Monetary Policy (MP) curve? x = 01 λ=1 r=2 What is the expression for the Aggregate Demand (AD) curve? Assume that =1%. What is the real interest rate (r)? and equilibrium level of output? Suppose the Bank of Canada increases r to r=3.5. What is the new real interest rate and new equilibrium level of output? What type of monetary policy did the Bank undertake? What would be the reason the bank that the Bank would undertake this type of policy? (Maximum 2 sentences)
B. Consider the following model where the monetary policy will be the only policy variable affecting demand for output. For expositional purposes the income velocity of money is held constant. With these assumptions the aggregate demand for output can be written in logs as: mt + v = Pt+ Yt The above equation is the equation of exchange in logs (equation that addresses the relationship between money and price level, and between money and nominal GDP. The equation tells us that total spending (M x V) is equal to total sales revenue (P x Y)). To complete the model we need to add the aggregate supply equation and a money supply rule. yt = y'+ a(pt - Et-1pt1) (2) mt = Byt-1+Et (3) Given that agents form expectations rationally, find a solution for (i) yt and (ii) pt. Is there any scope in this model for the policy authorities to influence the output through systematic stabilisation policy? Explain your answer.
For the next four questions, assume the economy can be described by the following set of equations: C/Ỹ = 0.7 1/Ỹ = 0.1 – 4(R – F) G/Ỹ = 0.2 C+I+G =Y Also assume that i = 0.02 and Y = 10. This is a complete IS model. You will be given the value of R set by monetary policy in each question. For all questions, enter the answer rounded to 1 decimal place. Suppose a demand shock (which may be positive or negative) results in a new consumption function such that C/Y =0.9. Assume the other demand functions for investment and government spending are unaltered, and that monetary policy is neutral so that R=0.02. What is the value of short-run output ÿ in percent? Answer:
Suppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."
Refer to the following figure to answer the following questions. Price level (P) P3 P2 P1 I " D C stay at Y2 A Y1 Y2 Y3 B Real GDP (Y) According to the figure, if an expansionary monetary policy is fully expected, that policy will cause an economy initially in full-employment equilibrium to see real gross domestic product (GDP) 4 first increase from Y₂ to Y3 but then decrease back to Y₂. increase from Y₂ to Y3. decrease from Y₂ to Y₁ increase from Y₁ to Y2.
An economy with constant prices is described by an extended IS-LM model - that is, by an IS-LM model based on the following additional assumptions: - The central bank can set the real rate r, that therefore becomes the "policy rate" determined by monetary policy, and keeps it at the chosen level- Spending decisions (in particular investment decisions by firms) depend on the "real borrowing rate" r+x, sum of the real policy rate and the risk premium (x). Starting from an initial equilibrium position, suppose that the government cuts net taxes T and that at the same time the risk premoium x goes down. The central bank changes the policy rate to prevent these changes in T and x from affecting equilibrium production, that therefore remains unchanged. In the move from the initial equilibrium to the one that will be reached following the changes in x, T and r described above, the "real borrowing rate" r+x will have gone up, down or will have remained unchanged? Explain why.