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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TRUE FALSE The more the Fed accommodates shocks to money demand, the larger the (government) spending multiplier.
20) Use a graph to show the differences in the central bank reaction function if the Fed is more tolerant or less tolerant of deviations from inflation in the short run. 21) For each of the following scenarios, state the short-run effect on the AD curve. a. The price level decreases. b. The target inflation rate increases. c. The U.S. dollar falls in value relative to other currencies. d. Government spending increases. e. The Fed becomes more tolerant of deviations from the target inflation rate. 22) Explain why some shifts to the aggregate demand curve are temporary and why some are permanent.
please fill in the blanks and finish the graph: The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey symbol.Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Use the green line…
1. The latest data published by the Federal Reserve (Fed) on the evolution of the M2 for the period 2010-2017, the money supply shows a substantial increase: a) Measure graphically what were the effects on IS-LM, AD-AS model, if the economy presents a labor market, as is the case, completely flexible, with no redundancy costs and extreme mobility (no rigidities) b) Use the quantitative theory to measure the effects of the trend you see in the monetary base on the US economy in the long term. What do you expect to happen with nominal interest rate? FRED - M2 Money Stock 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Shaded areas indicate U.S. recessions Source: Board of Governors of the Federal Reserve System (US) fred.stlouisfed.org Billions of Dollars
Expected inflation is 1.5%. The economy is initially in macroeconomic equilibrium with a real interest rate of 3% and an output gap of 0%. That is, the economy is operating at its potential. Using the Fed model linking the IS-MP framework with the Phillips curve, draw a graph showing the effect of the following shock: A severe recession impacts most of Western Europe, where several of the US most important trade partners are located. Your graph should clearly indicate the conditions both before and after the shock.
) The Fed has increased the target rate of the federal funds rate nine times since December 2015. An increase in the targeted rate implies a reduction in the growth rate of the money supply. Use the rational expectations AD-AS model to show and explain how this policy could affect Y, N, W/P, r, and P in the short and long runs. Use two scenarios: a) Firms accurately anticipate the change in P; b) They initially underestimate the change in P. What are the implications for monetary policy of the rational expectations model? Many critics have said that the Fed's policy move would reduce economic growth. How can their arguments be countered? Note that the Fed has been very public about announcing its policy decisions since 1994.
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?
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.
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

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