Suppose an economy faces the following situation: current federal funds rate=4%; inflation rate= 3%; inflation rate target = 2%; and current GDP 3% lower than full-employment GDP. According to the Taylor rule, which policy approach should this country be using? O tight money none, since the federal funds rate is at the desired level quantitative easing accommodative monetary policy

Suppose an economy faces the following situation: current federal funds rate=4%; inflation rate= 3%; inflation rate target = 2%; and current GDP 3% lower than full-employment GDP. According to the Taylor rule, which policy approach should this country be using? O tight money none, since the federal funds rate is at the desired level quantitative easing accommodative monetary policy

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Monetary Policy: End of Chapter Problem Milton Friedman and Anna Schwartz argued in their Monetary History of the United States that money growth and velocity usually shift in the same direction. Thus, higher growth causes optimism and slower growth causes pessimism. They believed that velocity had its own shocks as well. a. Let's run through some examples of how this might work, in a setting where the Fed wants to keep AD growth stable at 10%. To keep things simple, we will assume that the Fed can control money growth perfectly. We will also assume that a 1% change in money growth causes a 0.5% shock to velocity growth in the same direction. Using these assumptions, fill in the missing values for the following table. For each case: AD = Initial Velocity Shock + Money Growth + Velocity Shock Caused by Money Growth Round your answer to the nearest hundredth. Year 2 money growth: Year 3 money growth: 254 15 Incorrect 8 incorrect Year 2 3 Initial Velocity Shock 4% 3% 16% 8% 4% 0% Year 2…
2.18 Privatizing a state enterprise or establishment that is losing money, helps to improve the Treasury's fiscal deficit in several ways. True D False O Defend your answer: 2.19 "Ongoing inflation is always and everywhere a monetary phenomenon." To eliminate inflation, Peru drastically reduced the rate of growth in its money supply. True D False O Defend your answer: 2.20. Suppose you wanted to dollarize Venezuela today. What steps would you take?
In regard to monetary policies, nonactivists have various proposals. True or False: Some nonactivists believe in the Taylor rule, which suggests that the annual money-supply growth rate should be based on the growth rates of velocity and Real GDP to ensure that the price level does not fluctuate. O False O True Which of the following statements best explains the difference between the Taylor rule and the two other nonactivist rules (the constant-money growth rate rule and the predetermined-money growth rate rule)? O The Taylor rule does not take into account the stability of prices. O The Taylor rule suggests how much the money supply should grow. O The Taylor rule does not take into account the current state of the economy. O The Taylor rule is not a derivation of the equation of exchange.
Expansionary monetary policy is when: None of the statements are correct. The president and congress agree to lower interest rates. The president orders the Federal Reserve to cut income taxes. The Federal Reserve reduces the regulations hindering our business community. The Federal Reserve increases the nation's money and credit supply and raises interest rates. Moving to the next question prevents changes to this answer. O JUL 21 tv 10 ^ O
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If the economy is currently experiencing 10% inflation, which Monetary Policy changes should the Federal Reserve implement (used)? Select all that apply O increase the reserve requirement O lower the reserve requirement O increase the discount rate O lower the discount rate O sell bonds on the open market O buy bonds on the open market O O O O O O
In regard to monetary policies, nonactivists have various proposals. True or False: Some nonactivists believe in a predetermined-money growth rate, which suggests that the monetary authorities should target the proper federal funds rate before implementing monetary policies. O True O False Which of the following statements best explains the difference between the Taylor rule and the two other nonactivist rules (the constant-money growth rate rule and the predetermined-money growth rate rule)? O The Taylor rule does not take into account the stability of prices. O The Taylor rule is not a derivation of the equation of exchange. O The Taylor rule suggests how much the money supply should grow. O The Taylor rule does not take into account the current state of the economy.
3 E 1.7 The hypothetical information in the table below shows what the values for real GDP and the price level would have been in 2019 if the Federal Reserve did not use monetary policy: Real GDP F3 Year 2018 2019 Cxpansionary Di bills or sold them? $ d wanted to keep real GDP at it R a. Real GDP b. Full-employment real GDP c. The inflation rate d. The unemployment rate F4 b) Suppose the Fed's policy was successful in keeping real GDP at its potential level in 2019. State whether each of the following would be higher or lower than if the Fed had taken no action: Potential Real GDP $18.5 trillion 19.0 trillion I c) Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2018 and 2019; SRAS curves 2018 and 2019; AD curve for 2018 and 2019, with and without monetary policy actions; and equilibrium real GDP and the price level in 2019 with and without policy. % 5 T F5 O Search A 6 $18.5 trillion 19.4 trillion F6 Y F7 &…
a. Suppose growth rate of Real GDP is 6% and the growth rate of velocity is 3%. If Bangladesh Bank wants to have a 5 % inflation rate, what should be the growth rate of money supply according to the predetermined-money-growth-rate-rule? b. Suppose you got 2000 taka note as Eid gift from your uncle. What are the minimum increase and the maximum increase in the money supply that may result? Why they might be different? Assume the required reserve ratio is 10 percent. c From the equation of exchange, how would you explain the impact of rise in money supply to real GDP and price level? Consider velocity and real GDP are constant.