Suppose that the economy is currently at the natural rate ofinterest, r*, with no output gap and inflation at its target, i*. Nowsuppose that the natural rate of interest decreases to r < 0. Thatis the natural rate of interest is below zero (it is a real interest rate,and thus can be below zero). Answer the following questions aboutthis scenario:A. Show on the two diagrams how the Fed gets stuck at the zerolower bound in this case. At this point, does the economy havean output gap? Where is inflation relative to its target rate?B. Suppose the Fed pursues Forward Guidance, and raisesinflation expectations. Draw the effect of this on the PhillipsCurve diagrams.C. If the Fed successfully removes the output gap, where isinflation relative to its target? If the Fed is balancing its DualMandate, would you expect it to maintain the nominal interestrate target of zero? Why or why not?

Answered: Suppose that the economy is currently…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that inflation is 2 percent, the federal funds rate is 4 percent, and real GDP is 5 percent above potential GDP. According to the Taylor rule, in what direction and by how much should the Fed change the real federal funds rate? SEE PICTURE!!
Suppose the government decides to decrease government expenditures as a means of cutting the existing government budget deficit. Using a graph of aggregate demand and supply, show the effects of such a decision on the economy in the short run. Describe the effects on inflation and output. What will be the effect on the real interest rate, the inflation rate, and the output level if the Bank of Canada decides to stabilize the inflation rate?
What would be the effect of an increase in money supply on aggregate demand, GDP and inflation ? Use appropriate diagram (s) to illustrate and explain your answer.
As per the additional reading “What should be the Fed’s response to Stagflation”, all the following statements are true EXCEPT Group of answer choices The risks of stagflation are real. The Fed should try and taper its balance sheet first and then raise the interest rate. The Federal Reserve (Fed) should raise the interest rates immediately. The Fed needs to have a more meaningful monetary tightening.
If the economy is in a long-run equilibrium when the Federal Reserve decides that its inflation target is too low and chooses to raise it, ________. A) it would likely conduct a tightening of monetary policy by raising the real interest rate for any given inflation rate B) it would likely conduct an easing of monetary policy by lowering the real interest rate for any given inflation rate C) it would likely conduct an easing of monetary policy where the real interest rate would increase due to the ensuing decrease in aggregate demand D) it would likely conduct a tightening of monetary policy where the real interest rate would increase due to the ensuing increase in aggregate demand E) none of the above
1
given the graph and The current target inflation rate in 8 percent. The natural rate of unemployment is 5 percent and Okun's alpha is 8. The oil producing countries unexpectedly and drastically increase oil prices. As a result the short run aggregate supply function shifts up by 3 percentage points at each and every level of real GDP. what will the inflation rate be? what will the cyclical unemployment be? and If the Fed tries to bring the inflation rate back to the target level, the cyclical unemployment will increase to what?
Solve this economic If the Fed is able to permanently reduce the inflation rate, households will eventually lower their expectation of the inflation rate. Once that happens, the Phillips curve will shift ________, and the Fed can return output to potential GDP by ________ the real interest rate.Select one: a)up; lowering b) up; raising c) down; raising d) down; lowering
Explain the impact effect of this shock on output, inflation, and the real interest rate. Explain the dynamic response of output, inflation, and interest rates in subsequent periods. Does the economy converge back to the same long-run equilibrium? Explain how the central bank responds to inflation and the importance of the monetary authority following the Taylor principle. How would your answer to (B) change if the shock lasted for several periods (instead of one period) before reverting to zero?
Assume the following information for an economy: Natural level of output = $190b Autonomous consumption = 50 Total investment = 16 Government expenditure = 19 Autonomous taxation = 20 Marginal propensity to consume = 0.6 Based on this information answer the following questions: b) Calculate the output ratio for the economy.
Give typing answer with explanation and conclusion Suppose that actual inflation is 4 percent, the Fed's inflation target is 2.5 percentage points, and unemployment rate is 3.5 (which is 0.5 percent below the Fed's full-employment target of 4 percent). According to the Taylor Rule, what value will the Fed want to set for its targeted interest rate?
Suppose the Federal Reserve decides to raise its long-run target for the rate of inflation. a. How does the Fed need to change its reaction function in order to do this? b. How will this change affect output in the short run?

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