Advmacro hw (7)

Q27 How are the following three questions related: 1) Do all demand curves slope downward? 2) How do wages affect labor supply? 3) How do interest rates affect household saving? They all relate to the theory of consumer choice.  They all relate to macroeconomics.  They are not related to each other in any way. They all relate to monetary economics.

Analyse the impact of these events on the price level and total output of an economy in the short term. If policymakers were to use monetary policy to actively stabilize the economy, in which direction should they move the money supply and interest rate and show the effects of these policies? Please discuss your answers with appropriate graphs. - (a) The government raises taxes and reduces expenditures to balance its budget. (b) Enterprises in the economy are pessimistic about the economy in the future. - (c) Foreigners increase their taste for domestically produced beef. (d) The money wage rate rises.

Question 3: A individual wants to manage its demand for monetary assets. The options available include a bank deposit that pays 15% interest but requires 2 hours of dedicated time at bank during work hours to withdraw money. The total transaction need is $10,000 and the hourly wage rate if $7 for the individual. Find the optimal visits to the bank and average amount that is kept at bank. The economy is experiencing high inflation and the Governor State Bank makes the following observations. The Growth of Money Supply is 40%, the growth of income Y is 10% and growth in nominal interest rate is 20%. The interest rate elasticity is -0.1 and income elasticity is 0.5. What is the current inflation, and what should be the new value of money growth if Governor wants inflation to be 2%.

3b. Suppose a country has a money demand function (M/P)d kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?

Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?

Suppose a country has a money demand function (M/P)ª = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What is its relationship to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.

Chapter 14, Problem 5, p. 530. (not answered) In the New Keynesian model, how should the central bank change its target interest rate in response to each of the following shocks? Use diagrams and explain your results. (a) There is a shift in money demand. (b) Total factor productivity is expected to decrease in the future. (c) Total factor productivity decreases in the present Chapter 14, Problem 6, p. 530. (not answered) In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as possible to economic efficiency. That is, ideally the central bank would like the output gap to be zero. Suppose initially that the economy is in equilibrium with a zero-output gap. (a) Suppose that there is a shift in money demand. That is, the quantity of money demanded increases for each interest rate and level of real income. How well does the central bank perform…

Explain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.

Consider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?

The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year.   a) What happens to prices?  b) What happens to nominal interest rate?  c) Why might the government be doing this?

If you deposit money in the bank for one year scenario 1: nominal interest rate = 10%, inflation rate = 0%  Scenario 2: normal interest rate = 25%, inflation rate = 15% In which scenario does the real value of the deposit grow the most? Explain.

Question 7. Using the models learned in class, graphically illustrate and explain the impact of the following policy and explain your answer. Suppose the Bank of Canada reduces the money supply by 5%. a. What happens to the aggregate demand curves? b. What happens to the level of output and the price level in the short run and in the long run? c. What happens to the real interested rate in the short run and in the long run?

2-5 Kraft and Cadbury When Kraft recently bid $16.7 billion for Cadbury, Cadbury’s market value rose, but Kraft’s market value fell by more. What does this tell you about the value-creating potential of the deal? for one of the surgeries has increased by about 10% each year since 1995, whereas the other has increased by only 2% per year. Which of the surgeries has the lower inflation rate? Why?

23. An understanding of the state of the economy, projections on economic growth, the floor framework, and the way the Federal Reserve works allows you to: a. understand which way interest rates might change. b. accurately forecast the spread between short-term and long-term interest rates. c. predict the size of the future output gap. d. predict the exact inflation rate in the future.

When the inflation rate is expected to increase, the real cost of borrowing               at any given interest rate; the supply of bonds _____  and the supply curve shifts to the _____.   Question 1 options:   declines; decreases; left   declines; increases; right   rises; decreases; left   rises; increases; left   rises; increases; right   declines; increases; left   rises; decreases; right   declines; decreases; right

Problem four For this question, refer to the Bank of Ghana's Monetary Policy Committee Press Release of May 21, 2018. a) Explain the difference between monetary loosening and monetary tightening. According to the statement, the MPC reduced the monetary policy rate by 100 basis points. Does this constitute a monetary loosening or monetary tightening? Explain. b) When deciding whether to tighten or loosen monetary policy, central banks weigh the relative risks to price stability and growth. Mention two indicators that the MPC use to gauge the risk to inflation and two indicators the MPC use to gauge the risk to growth. c) Based on the information in the Press Release, in the thinking of the MPC did the risk to growth outweighed the risk to inflation or vice versa? Refer to specific points from the press release to back up your argument. d) Using the money market diagram studied in class, explain the effect of this policy measure on the real interest rate. e) In ordinary language, explain…

Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 5%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Time Period Before increase in MS Immediately after increase in MS Nominal Interest Rate (Percent) 12 12 Expected Inflation (Percent) 5 5 The unanticipated change in inflation arbitrarily benefits Actual Inflation (Percent) 5 10 Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 5% to 10% per year. Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts immediately after the increase in the money supply (MS). Now consider the long-run impact of the change in money growth and inflation. According to…

The economy of Macro Island is described by the quantity equation with constant velocity. All residents of Macro Island understand the quantity theory and use it to form their expectations of inflation. Real income grows at a steady 2 percent per year, and the nominal interest rate is 5 percent. In one year, people had expected the money supply to grow by 4 percent, but in fact it grew by only 3 percent.   a. What was the inflation rate? (3% 4% 1% 2%)   b. What was the expected inflation rate? (1% 4% 3% 2%)   c. What was the ex ante real interest rate? (4% 2% 1% 3%)   d. What was the ex post real interest rate? (2% 1% 4% 3%)   e. Did the deviation of inflation from what was expected hurt creditors or debtors? ( Creditors Debtors)

Question: Consider an economy where the velocity of money is constant, and the economy is at full employment. If the central bank decides to increase the money supply by 5% but at the same time, the government imposes new taxes that effectively remove 5% of the consumers' disposable income, what would be the likely short-term effect on the nominal Gross Domestic Product (GDP) and the general price level? A) Nominal GDP remains unchanged; the general price level increases. B) Nominal GDP increases; the general price level remains unchanged. C) Nominal GDP remains unchanged; the general price level decreases. D) Nominal GDP increases; the general price level increases. Please don't use chatgpt it is giving wrong answer. Please try do it with yourself.