Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 27, Problem 2.2P
Sub part (a):
To determine
Identify the effects of a sharp decline in investments in goods market and money market.
Sub part (b):
To determine
Identify the expansionary policies and rank them.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Paranoia, the largest country in central Antarctica, receives word of an imminent penguin attack. The news
causes expectations about the future to be shaken. As
a consequence, there is a sharp decline in investment
spending plans.
a. Explain in detail the effects of such an event on the economy of Paranoia, assuming no response on the part of the
central bank or the Treasury (Ms
, T, and G all remain constant.) Make sure you discuss the adjustments in the goods
market and the money market.
b. To counter the fall in investment, the King of Paranoia
calls for a proposal to increase government spending. To
finance the program, the Chancellor of the Exchequer has
proposed three alternative options:
(1) Finance the expenditures with an equal increase in taxes
(2) Keep tax revenues constant and borrow the money
from the public by issuing new government bonds
(3) Keep taxes constant and finance expenditures by
printing new money
Consider the three financing options and rank them…
The diagram on the right shows the demand for money curve in a hypothetical economy.
Suppose that the economy is initially at point E.
Suppose that due to changes in expectations in the financial markets, the quantity of money
demanded increases because of speculative reasons.
This change would be associated with a movement from E to point EB
C
Interest Rate %
EB
Eo
EA
Quantity of Money
MD (Y,P)
Explain how an increase in government expenditure can affect the goods market and moneymarket by taking the link between the two markets into account.
Chapter 27 Solutions
Principles of Economics (12th Edition)
Knowledge Booster
Similar questions
- 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.arrow_forward6arrow_forwardA country's central bank is engaging in monetary contraction, with M going from M0=40 to M1=20. Its economy is as follows. Goods: slc = 3 MPC = 0.7 G = 10 T = 9 Before the policy, the goods market equilibrium is at Y0 = 54. Financial: I = 18-200r Before the policy, the loans market equilibrium is at r = 4.25% and I = 9.5 Money: M0 = 40 P0 = 2 M/P = 0.02 / (r - Y/5000)^2 and finally, Labor: w = MPL = 0.5 * 4.5 * 16^0.5 / L^0.5 w = EP / P0 * L^0.5 Where workers currently expect the price level of EP=2. How does the monetary contraction directly and immediately affect the goods market? There are four endogenous variables that adjust in response to shock/policy: Y, I, r, P. The policy variable of interest is M. Therefore, let's approach our solution by first recognizing that all other letters are just constants and plug them in. For example: Y = 2 + 0.5(Y-6)+7+I becomes Y = 12 + 2*I First, express the goods market as expenditure being a linear function of investment I of the form: Y = a…arrow_forward
- A country's central bank is engaging in monetary contraction, with M going from M0=40 to M1=20. Its economy is as follows. Goods: slc = 3 MPC = 0.7 G = 10 T = 9 Before the policy, the goods market equilibrium is at Y0 = 54. Financial: I = 18-200r Before the policy, the loans market equilibrium is at r = 4.25% and I = 9.5 Money: M0 = 40 P0 = 2 M/P = 0.02 / (r - Y/5000)^2 and finally, Labor: w = MPL = 0.5 * 4.5 * 16^0.6 / L^0.5 w = EP / P0 * L^0.5 Where workers currently expect the price level of EP=2. - There are four endogenous variables that adjust in response to shock/policy: Y, I, r, P. The policy variable of interest is M. Therefore, let's approach our solution by first recognizing that all other letters are just constants and plug them in. For example: Y = 2 + 0.5(Y-6)+7+I becomes Y = 12 + 2*I First, express the goods market as expenditure being a linear function of investment I of the form: Y = a + b*I 1. How does the monetary contraction directly and immediately affect the…arrow_forwardi need help with the last question Suppose the economy is initially at long run equilibrium, when there is an unexpected increase in firm investment in the country.How does this impact the economy? (write out either "inflationary" or "recessionary" inflationary In response to this what monetary policy would the Fed employ? (write one of the following: "raise taxes", "lower taxes", "raise money supply", or "lower money supply"lower money supplyWhat is the most likely way the Fed will accomplish this change in the monetary policy? (write one of the following: "buy securities", "sell securities", "raise discount rate", "lower discount rate", or "legislation"sell securitiesThis action by the Fed will cause interest rates to _______. (Write out "increase" or "decrease"increaseThe end result of the monetary policy is a shift of which curve in which direction. (Write out one of the following: "AD right", "AD left" "AS left", "AS right"arrow_forwardExplain how an increase in a price level will affect the demand for money and the aggregate demand. Use relevant graphs to support your answer.arrow_forward
- Suppose that changes in bank regulations expand the availability of credit cards so that people need to hold less cash. a. How does this event affect the demand for money? b. If the Fed does not respond to this event, what will happen to the price level? c. If the Fed wants to keep the price level stable, what should it do? (Please show me the graphs. Explanations do not need to be specific.)arrow_forwardAccording to Keynes, increasing the money supply should lower interest rates in the economy. Milton Friedman notes that while it is true that expansionary monetary policy can lower interest rates, it is only part of the story. a. Briefly explain under what conditions an expansionary monetary policy will indeed lower interest rates, both in the short and long run. A graph may help answering this question.b. Briefly explain under what conditions an expansionary monetary policy will increase interest rates. A graph may help answering this question.arrow_forwardHello, I need help with a macroeconomics question. Thank you in advance! The answers are based on a short exerpt from the Federal Reserves press release from Feb 1, 2023 (attatchde below). 7. What do you expect to happen to the money supply? 8. What do you expect to happen to the inflation rate? 9. How would you expect all these decisions to affect employment in the economy? 10. How do the effects you found on 8 and 9 align with what the Fed was hoping to attain?arrow_forward
- Sylvia, a writer for a newspaper, interviewed top managers at 50 large corporations. All of the managers indicated that the primary determinant of planned investment is the interest rate and not their expected sales. In addition they all told her that their desired investment function is very flat. From this information, if Sylvia is a good macroeconomist, she would conclude that Group of answer choices neither expansionary nor contractionary monetary policy would be very effective. both expansionary and contractionary monetary policy would be very effective. fiscal policy would be very effective, but monetary policy would not be very effective. fiscal policy would not be very effective, but monetary policy would be very effective.arrow_forwardUse the following information for this problem: Goods Market: Asset Market: C = 3+0.5(Y-T) MS = 25/P; assume that the P=1 initially I = 12-50r MD = Y - 50r T = 10 G = 10 Suppose that when the economy is in the Short Run equilibrium (hand draw a new graph starting at the Short Run) the Federal Reserve wants to conduct a stabilization policy. What is the policy they would use called? Show graphically how they would stabilize.arrow_forwardTo https://aplia.apps.ng.cengage.com/ar/serviet/quiz?cx=bkhana-0031&quiz_action=takeQuiz&quiz_probGuid=... The following graph shows a decrease in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the left from AS₁ to AS2, causing the quantity of output supplied at a price level of 100 to fall from $200 billion to $150 billion. ? 200 AS 175 AS₁ 150 125 100 75 50 25 0 PRICE LEVEL 0 50 300 200 250 QUANTITY OF OUTPUT 100 150 350 400 Yoarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning