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
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…
Q8
Which of the following statements is consistent with a given (i.e., fixed) IS curve?
Select one:
a. A reduction in the interest rate causes money demand to decrease.
b. A reduction in the interest rate causes investment spending to increase.
c. An increase in government spending causes an increase in demand for goods.
d. A reduction in the interest rate causes an increase in the money supply.
Consider the money market in the accompanying graph.
Initially, the equilibrium interest rate and quantity are
represented by the point, El. Suppose the central bank
reduces the money supply. Adjust the graph of the money
market to illustrate this change and label the new equilibrium
by moving the point, E2.
After this recent change in the money supply, what is
true about the point E1?
The quantity of money demanded is more than the
quantity of money supplied.
The quantity of money demanded is less than the
quantity of money supplied.
The quantity of money supplied is more than the
quantity of money demanded.
Those selling interest-bearing nonmonetary assets
will face market pressure to lower their interest rates.
Interest rate (%)
Incorrect
10
9
8
7
6
5
4
3
2
1
0
0
1
2
E2
Money Market
EI
3 4 5 6
Quantity of money
7
8
MS
MD
9
10
Chapter 27 Solutions
Principles of Economics (12th Edition)
Knowledge Booster
Similar questions
- Econ question: a.Explain and show the impact on the money market when the Federal Reserve lowers the interest rate on bank reserves (the IORB). Graph and Detail the adjustment process. (the seps to equilibrium) b. How is the level of investment in the economy affected? Graph and explain. Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forward7. 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. (M², 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 the expenditures by printing new money Consider the three financing options and rank them from…arrow_forward7. 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. (MP, 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 the expenditures by printing new money Consider the three financing options and rank them from…arrow_forward
- Explain how an increase in government expenditure can affect the goods market and moneymarket by taking the link between the two markets into account.arrow_forwardWhich answer do you guys think is the correct one?arrow_forwardWhat 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_forward
- 6arrow_forwardConsider a closed economy where the goods and money markets are described by the following relationships: C = 200 + 0.9(Y – T) 1 = 400 – 15r M = 200 + Y – 100r G = 150 T = 100 M = 2000 P = 2 Where Cis planned consumption, / is planned investment spending, Tis government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. Department of Economics a) Derive the two expressions for the IS and LM equilibrium relationships respectively. Sketch a graph of the two relationships. b) Calculate the equilibrium value of output Y and interest rate r (round off your answers to one decimal point). Compute also the level of consumption and investment spending in equilibrium and check whether the actual level of spending matches the equilibrium level of output.arrow_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 * 16^0.6 / 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_forward
- i 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_forwardSuppose 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_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