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

Assume the monetary policy curve is given by r = 1.5 +0.75π. a) Calculate the real interest rate when the inflation rate is at 2%, 3%, and 4%. b) Plot the monetary policy curve and identify the points from part (a).
we make use of the general monetary model here, where L is no longer assumed constant, and money demand is inversely related to the nominal interest rate. Recall from that earlier question inflation rate in Korea is = 10% and inflation rate in Japan is = 0%. In addition, assume that the bank deposits in Japan pay 2% interest rate (i¥ = 2%). Compute the interest rate paid on South Korean won deposits (iwon). Using the definition of the real interest rate, show that the real interest rate in South Korea (rwon) is equal to the real interest rate in Japan (r¥) Suppose the Bank of Korea decreases the money growth rate from 15% to 10% and the inflation rate falls proportionately (one for one) with this decrease. If the nominal interest rate in Japan remains unchanged, what happens to the interest rate paid on Korean won deposits? Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s…
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.