On 24 February 2022, Russian forces launch full-scale invasion of Ukraine.This has lead affected business confidence in the US. Show the effect on the following models given the Fed’s response (a) IS-LM & Fed fights inflation (b) AD-AS & Fed takes actions to support jobs
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. On 24 February 2022, Russian forces launch full-scale invasion of Ukraine.This has lead affected
business confidence in the US. Show the effect on the following models given the Fed’s response
(a) IS-LM & Fed fights inflation
(b) AD-AS & Fed takes actions to support jobs
Step by step
Solved in 2 steps
- Suppose the Federal Reserve announced that itWould pursue contractionary monetary policy toReduce the inflation rate. Would the followingConditions make the ensuing recession more or lessSevere? Explain.A. Wage contracts have short durations.B. There is little confidence in the Fed’s determinationTo reduce inflation.C. Expectations of inflation adjust quickly to actualInflationWe are in eqm in the full SR model, IS-LM. Following a single shock (so that only one curve shifts), cet. par., we see that the nominal interest rate has fallen and Y has risen then we know with certainty that the Fed has engaged in expansionary policy. True, False, or Uncertain? Show graph in i-Y space and explain fully.The Fed's target for the federal funds rate A)is a goal that is rarely acheived because the fed can determine only the money supply B) is an extra policy tool for the central bank, in addition to and independent of the money supply C) commits the fed to set a particular money supply so that it hits the annouced target D) matter to banks that borrow and lend federal fund but does not influence aggregate demand.
- Time remaining: 00 :09 :06 Economics If there is an inflationary gap, what should the Fed do? Explain, provide name, and show in i-M space. Consider the following macroeconomy, with fixed prices (all amounts are in millions of $): YFE = 7000 C = 40 + 0.9 YD I = 500 G = 250 T = 40 a. Calculate eqm Y in this model and then graph it in the Keynesian-cross diagram. Indicate and provide the name and size of the gap, if any. b. Prove that the appropriate relationship between I and various types of Savings holds at eqm. c. What two different policies could Congress enact? You must calculate the exact changes in the appropriate variables and provide the appropriate name(s) for the(se) policies. Graph each of these policies in the Keynesian-cross diagram. Show what your policies would do, if anything, in the money-market diagram, (in i- M space) cet. par. Indicate the initial disequilibrium and explain what will happen and why. d. Go back to the original eqm in part a. Now…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.The economy begins in long-run equilibrium. Then one day, the president appoints a new Fed chair. This new chair is well known for her view that inflation is not a major problem for an economy. a. How would this news affect the price level that people expect to prevail? b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts? c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level?
- How do you know if the Fed's actions achieve the goal of stable prices? The goal of stable prices is achieved when _______. A. the prices of food, clothing, and shelter are stable B. the PCEPI inflation rate excluding food and energy prices is 2 percent a year C. the general level of prices is changing, but we can accurately predict the rate of change D. the inflation rate is zero percent a yearThe Fed’s target for the federal funds ratea. is an extra policy tool for the central bank, inaddition to and independent of the money supply.b. commits the Fed to set a particular money supplyso that it hits the announced target.c. is a goal that is rarely achieved because the Fedcan determine only the money supply.d. matters to banks that borrow and lend federalfunds but does not influence aggregate demand.Consider the following short-run IS-LM model. Assume the central bank targets the nominal interest rate and expected inflation is zero. C = 300 + .50YD I = 1000 + .10Y – 5000i G = 700 T = 600 M/P = 100 + .25Y - 6250i P = 1 i = .06 Y-T = YD Solve for the IS equation and the LM equation. Find the equilibrium and also show it on a graph of IS-LM. Find the equilibrium values for C, I, and the money supply M. Consider a fiscal stimulus: what is the impact on Y if G rises by 100? What is the impact on I in this case? What is the impact on the interest rate and the money supply? Return to your original analysis. Consider a monetary stimulus where the central bank sets a new target interest rate, i = .04. Find the new equilibrium values for Y, C, and I. Find and discuss any change in the money supply. What causes the change in I in this case? Explain.
- Assume that the fed adopts an inflation-targeting strategy. if oil prices rive abruptly by 20percent in response to an oil shortage, describe how the fed's monetary policy would be affected by this situation. do you think the inflation-targeting would be more or less effective in this case than if the fed balances its inflation concerns with unemployment concerns? explain?The Fed is fighting recession and it happens to overstimulate the economy. If the expected inflation rate rises above the 2 percent goal, what is the cost of returning the inflation rate back to its goal? The cost of returning the inflation rate back to its goal is _______. A. an inflationary gap and an even higher inflation rate than initially B. unemployment below the natural unemployment rate C. a decrease in potential GDP and aggregate supply D. a recessionary gap and a higher unemployment rate Thanks!With a policy of nominal GDP targeting, if the Fed expected 6% growth in real GDP and wanted an inflation rate of 2%, it would set a target for nominal GDP growth of 8% per year. True False
