Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 26, Problem 2.1P
To determine
The changes in investment, consumption, and GDP (
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On June 5, 2003, the European Central Bank acted to decrease the short-term interest rate in Europe by half a percentage point, to 2 percent. The bank’s president at the time, Willem Duisenberg, suggested that, in the future, the bank could reduce rates further. The rate cut was made because European countries were growing very slowly or were in recession. What effect did the bank hope the action would have on the economy? Be specific. What was the hoped-for result on C, I, and Y?
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Three countries are in a currency union. The countries are identical in that each has the same
equilibrium level of output of £50 billion consistent with the same real interest rate of 2%, but each
country is currently experiencing a different level of inflation as shown in Table 1. If the central bank for
the currency union sets its (nominal) base rate at 7%, which one of the countries is likely to see an
increase in its aggregate demand? (Hint: you need to use the real interest rate equation given in Chapter
8, Section 2.2 and may wish to review Chapter 8, Section 2.4.)
Table 1 Information about three countries
Country A
Country B
Country C
Equilibrium output
£50 billion
£50 billion
£50 billion
Equilibrium real
2%
2%
2%
interest rate
Inflation rate
2%
5%
9%
Select one:
O Country A
O Country B
O Country C
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Chapter 26 Solutions
Principles of Economics (12th Edition)
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