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 2.3P
To determine
Identify the effects of
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
C = 100 + 0.5 - (Y – T)
I = 500 – 1000 -r
where Y is real output and r is the real interest rate. Government purchases and taxes are
G = 500, Ť= 100.
The LM (money market equilibrium) curve is
M Y
P
where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying
M = 8000 units of money, and expected inflation is a = 0.
Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially
at the same level (Y = 2000).
Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05.
1. Explain how the short-run values of (r, i) are determined before the vaccine news shock.
2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to
the vaccine news shock? Explain.
3. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s)
due to the vaccine news shock? Explain.
4. Which, if any, of the graphs…
Which of the following statements about the debate over stabilization policy are correct? Check all that apply.
Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses.
Opponents of active stabilization policy believe that significant time lags in both fiscal and monetary policy often exacerbate economic fluctuations.
Opponents of active stabilization believe that active fiscal and monetary policies have no effect on aggregate demand.
Advocates of active stabilization believe that implementation lags for fiscal and monetary policy do not exist.
C = 100 + 0.5 - (Y –T)
I = 500 – 1000 - r
where Y is real output and r is the real interest rate. Government purchases and taxes are
Ĝ = 500, Ť= 100.
The LM (money market equilibrium) curve is
M Y
where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying
M = 8000 units of money, and expected inflation is xª = 0.
Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially
at the same level (Y = 2000).
Suddenly, news of a new world-beating super-vaccine raises expected inflation to “ = 0.05.
3. Continue to suppose the government doesn't do anything, and the CB wants to stabilise the shock
in the short-run but instead of output, the CB wants to bring the nominal interest rate i back to
its long-run equilibrium level. Explain whether it should decrease or increase money supply M, and
what happens to short-run output Y and the real interest rate r if this policy is followed.
4. Suppose the CB…
Chapter 27 Solutions
Principles of Economics (12th Edition)
Knowledge Booster
Similar questions
- The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Businesses make investment plans many months in advance. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Which of the following are examples of automatic stabilizers? Check all that apply. Personal income taxes The federal funds rate Unemployment insurance benefitsarrow_forwardQ7.On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 4, 2020) decided tokeep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent.Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. Assess the present liquidity scenario in India and give your opinion about the impact of this reduction on money supply and also suggest other measures that RBI can take in recent times to maintain liquidity.arrow_forwardAs a response to high inflation, in March 2022, the Federal Reserve System (Fed) approved its first interest rate hike since December 2018. However, inflation rate still remained very high and piked in June 2022. The last time inflation ran that high was in the 1980s. To bring down inflation, the Fed implemented more restrictive monetary policy and approved another interest rate hike of 0.75 percent in November 2022. The Fed decided to maintain the federal funds rate at a target level of 4%. What the Fed need do to achieve a higher target federal funds rate (how to implement monetary policy)? If CPI increased from 287.7 in the 2nd quarter (Q2) 2022 to 298.1 in the 3rd (Q3) 2022. Using CPI-based inflation rate, how much is real interest rate if the Fed sets nominal interest rate at 4%. Note: we assume velocity of money supply is constant.arrow_forward
- C = 50 + 0.9 · (Y – T) I = 50 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 500. The money market equilibrium curve-or LM curve-is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 10000 units of money, and expected inflation is zº = 0.05. The long-run aggregate supply (LRAS) is Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the consumption function changes to C' = 50 + 0.8 · (Y – T). 1. Explain how the short-run values of (r, i) are determined before the climate shock. 2. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the climate shock? Explain. 3. Which, if any, of the graphs from Appendix B best depicts the short-run change in output and price due to the climate shock? Explain. 4. Which, if any, of the graphs from Appendix C best…arrow_forwardThe financial system in Jamaica has been the subject of much attention since the news broke of the alleged fraud at Stocks and Securities Limited (SSL). The governor of the Bank of Jamaica (BOJ) has been fielding calls from concerned investors, international financial institutions, and even other regional regulators concerning the impact of this situation and the negative media reporting would have on the stability of the financial system in Jamaica and the Caribbean region.The governor would like to preserve confidence in the financial markets and institutions and has decided to embark on a series of educational “road-shows” where he will address targeted stakeholders such as the American Chamber of Commerce (AMCHAM), investor groups and the media.In this regard, the governor has assigned your team of senior professionals employed at the Bank of Jamaica to prepare a presentation slide deck for his address. Give an overview of the structure of the Jamaica financial systemThe role of…arrow_forwardC = 100 + 0.5 - (Y – T) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are G = 500, T = 100. The LM (money market equilibrium) curve is M Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to xº = 0.05. Question 4 The CB wants to use open market operations to increase M. Explain what it would have to do, and what would happen to the monetary base B. What would happen to the nominal interest rate i in the short-run? How is it related to bond prices?arrow_forward
- After a series of measures to remedy the mortgage crisis that has beset the US economy, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve and his colleagues are once again looking at cutting the central bank’s key interest rate as they hope that lowering the interest rates will give the economy a boost by encouraging investors and consumers to borrow and spend (Associated Press, n. pag.). The Fed is looking at slashing the interest rate by a full percent however, many economist believe that this is not the appropriate remedy for economic conundrum (Gavin, n. pag). According to many analysts, the issue of the economy regarding the mortgage is the lack of confidence by both the lender and the borrower. Even as the Fed resorts to drastic interest cuts, the first time the central bank has cut a full percentage point in one shot since 1982, this provides little help if lenders are not loaning money out of fear they will not be repaid and the borrowers…arrow_forwardThe Federal Reserve uses an inflation target of 2-3%; most economists agree that the US natural rate of unemployment is around 4.5%. Imagine that you are a policy analyst observing the government and the Federal Reserve. You determine that inflation is 1% (very low) and unemployment is hovering around 6.5% (quite high.) The Federal Reserve responds by cutting interest rates and beginning to buy government bonds in open-market operations. The government takes the position that the only way out of a recession is to decrease government spending and passes a budget with very little spending (this is called "taking austerity measures"). What effects would the Fed's actions have, if taken alone? What effects would the government's actions have, if taken alone? What do you predict will occur when both actions are taken? Who do you think is making the right suggestion?arrow_forwardC = 100 + 0.5 - (Y – T') I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, Ť = 100. The LM (money market equilibrium) curve is Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. Question 5 Suppose that consumers finally decide to get rid of cash altogether, and only use debit cards. Nothing else changes, and the CB doesn't do anything either. What do you think will happen to money supply M and prices P in the short and long-runs? Does this change money demand?arrow_forward
- C= 100 + 0.5 - (Y – Ť) I = 200 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 300, T= 200. The LM (money market equilibrium) curve is Y 10i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is a = 0.02. Assume that the long-run equilibrium level of output is Y = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 - r Question 4 The CB wants to use open market operations to reduce M. Explain what it would have to do, and what would happen to the monetary base B. What would happen to the nominal interest rate i in the short-run? How is it related to bond prices? Question 5 After everyone is vaccinated, suppose that consumers suddenly withdraw all their checking deposits and start preferring cash…arrow_forwardAssume the U.S. economy is already operating above the full-employment level of GDP (i.e., above 2.5%). If the Trump tax cuts put additional upward pressure on GDP growth and inflation, fiscal policy should further increase government expenditures monetary policy should be raising interest rates monetary policy should do nothing monetary policy should decrease the growth rate of the money supplyarrow_forwardWhich of the following statements is (are) correct with regard to Lags in Monetary Policy versus Fiscal Policy? Statement 1: An inside lag exists between the time a policy change is needed and the time the Fed identifies the problem and decides which policy tool to use. The inside lag for monetary policy is shorter than for fiscal policy because fiscal policy is usually the result of a long political budget process. Statement 2: An outside lag occurs between the time a policy decision is made and the time the policy change has its effect on the economy. Statement 3: The total lag (inside plus outside lags) is longer for monetary policy than it is for fiscal policy. O Statements 2 and 3 only. O Statement 3 only. O All statements. O Statements 1 änd 2 only.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
