1.) An economic indicator is procyclical if it rises when the economy is expanding and falls during recessions, countercyclical if it falls when the economy is expanding and rising during recessions, and lagging if it changes only after the economy has begun to follow a particular trend.Interest rates (remain the same, increase, decrease) when there is a business cycle expansion. Therefore, interest rates are said to be (procyclical, lagging, countercyclical). 2.) Using the liquidity preference framework, when the economy expands,A.the demand for money will decrease, shifting the money demand curve to the right. B.the demand for money will decrease, shifting the money demand curve to the left. C.the demand for money will increase, shifting the money demand curve to the left. D.the demand for money will increase, shifting the money demand curve to the right. Using both the liquidity preference framework and the supply and demand for bonds framework, show whyinterest rates are procyclical (rising when the economy is expanding and falling during recessions).Using the graph to the right, show the effect on the bond supply and the bond demand curve. Properly label yourcurves. Indicate the new equilibrium interest rate and quantity of bonds and label it 2. Choose the correct answerbelow.O A.B.BW WBBQuantity of Bonds, BQuantity of Bonds, BC.BQuantity of Bonds, BQO D.BSBQuantity of Bonds, BCPrice of Bonds, PQuantity of Bonds, BB₁BQ

In this problem, the economy expands given the economic indicators are showing positive signs, while…

Answered: 1.) An economic indicator is…

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter14: The Financial Crisis And The Great Recessio

Section: Chapter Questions

Problem 1TY

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1.) An economic indicator is procyclical if it rises when the economy is expanding and falls during recessions, countercyclical if it falls when the economy is expanding and rising during recessions, and lagging if it changes only after the economy has begun to follow a particular trend.

Interest rates (remain the same, increase, decrease) when there is a business cycle expansion. Therefore, interest rates are said to be (procyclical, lagging, countercyclical).

2.) Using the liquidity preference framework, when the economy expands,

the demand for money will decrease, shifting the money demand curve to the right.

the demand for money will decrease, shifting the money demand curve to the left.

the demand for money will increase, shifting the money demand curve to the left.

the demand for money will increase, shifting the money demand curve to the right.

Using both the liquidity preference framework and the supply and demand for bonds framework, show why
interest rates are procyclical (rising when the economy is expanding and falling during recessions).
Using the graph to the right, show the effect on the bond supply and the bond demand curve. Properly label your
curves. Indicate the new equilibrium interest rate and quantity of bonds and label it 2. Choose the correct answer
below.
O A.
B.
B
W W
B
B
Quantity of Bonds, B
Quantity of Bonds, B
C.
B
Quantity of Bonds, B
Q
O D.
BS
B
Quantity of Bonds, B
C
Price of Bonds, P
Quantity of Bonds, B
B₁
B
Q

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