Lowering the nominal interest rate: Suppose the Fed announces today that it islowering the fed funds rate by 50 “basis points” (that is, by half a percentage point). Using the IS-MP diagram, explain what happens to economic activ-ity in the short run.
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Lowering the nominal interest rate: Suppose the Fed announces today that it is
lowering the fed funds rate by 50 “basis points” (that is, by half a percentage
point). Using the IS-MP diagram, explain what happens to economic activ-
ity in the short run.
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- 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?Assume that an economy is in long-run equilibrium. Assume consumers wish to hold less money because they use credit cards more frequently to purchase goods and services then cash. (a) Draw a correctly labeled graph of the money market and show the effect of the reduced holdings of money on the equilibrium nominal interest rate in the short-run. (b) Based on the change in the interest rate in part (a), what will happen to each of the following in the short-run? i. Prices of previously issued bonds ii. The price level and real income. Explain. (c) With a constant money supply, based on your answer in b(ii), will the velocity of money increase, decrease, or remain the same, or is the change indeterminate? (d) If the Central Bank wishes to reverse the change in the interest rate identified in part (a), what open market operation would it use?consider the money demand function. If the money supply is expected to be decreased in the next month what is the effect on the inflation this month? Describe briefly.
- In response to a decrease in interest rates, would the following things be smaller, larger, or no different in the long run than in the short run?a consumer expendituresb the inflation ratec the interest rated aggregate outputQ1: Consider the AS-AD model. Suppose the economy of Economica is initially at the general equilibrium. Suppose the central bank increases the nominal money supply by 10%. a). Explain and show graphically how an increase in the nominal money supply affects the labor, goods, or asset market. b). Explain and show graphically how an increase in the nominal money supply affect the short-run equilibrium in the AS-AD model. c). Explain and show graphically how an increase in the nominal money supply affect the general (long-run) equilibrium in the AS-AD model.Why are nominal wages sticky (adjust slowly) in the short run? wage contracts are made in nominal terms because interest rates adjust slowly the CPI adjusts quickly monetary policy takes time to affect nominal GDP
- Now, suppose the economy is back in long-run equilibrium, and then the price of imported oil rises. 1. On the following graph, shift a curve or adjust the point to reflect the short-run effect of the increase in the price of oil. (Please use the image attached) 2. True or False: If the Fed undertakes expansionary monetary policy, it can return the economy to its original inflation rate but the unemployment rate will be higher.Assume Canadian consumers expect future income to rise. Starting from the natural rate of output, explain with a graph how this expectation will affect the interest rate, inflation rate and real GDP in the short-run. Also show and explain how the bank of Canada can help take the inflation rate back to its original target?i need in your own words point to point answer Draw the IS-LM and AD-AS diagrams and explain the following: a. Suppose Fed increases M. Show the short-run effects on your graphs.b. Show what happens in the transition from the short run to the long run.c. How do the new long-run equilibrium values of the endogenous variables compare to their initial values?
- Consider an Economy in its medium run equilibrium. Now suppose that the government passes a stricter law against the exercise of market power leading to decline in mark-up over wages. Explain using IS-LM and AD-AS curves how it will affect price level, interest rate and output in the short run and in the medium run.The money demand function is (M/P)d = Y-150rThe money supply M is 1,000 and the price level P is 2. For this economy, use a graph to illustrate the LM curve for r ranging from 0 to 8.Q1. Consider the IS-LM model. Suppose the economy of Economica is initially at the general equilibrium. Suppose further that the central bank of Economica considers the increase of the nominal money supply as a policy tool and hires you as a consultant. Explain and show graphically how an increase in the nominal money supply would affect the labor, goods, or the asset market. Explain and show graphically how an increase in the nominal money supply would affect the short-run equilibrium. Explain and show graphically how an increase in the nominal money supply would affect the general (long-run) equilibrium. The use of monetary policy is highly debated among classical and Keynesian economists. Where do they agree and where do they disagree with respect to monetary policy?
