Suppose that money supply increases at the rate of 5 percent per year and the real GDP grows at the rate of 3 percent per year. Suppose also that the real interest rate is constant at 1 percent per year. Finally, assume that the velocity is constant. These numbers indicate that the one-year nominal interest rate must be around percent per year. Note: In the real world there are many different interest rates because there are many different bonds and loans. However, as we will see later, most interest rates move up and down together even though they might be different from each other For this reason we can assume that there is just one

Suppose that money supply increases at the rate of 5 percent per year and the real GDP grows at the rate of 3 percent per year. Suppose also that the real interest rate is constant at 1 percent per year. Finally, assume that the velocity is constant. These numbers indicate that the one-year nominal interest rate must be around percent per year. Note: In the real world there are many different interest rates because there are many different bonds and loans. However, as we will see later, most interest rates move up and down together even though they might be different from each other For this reason we can assume that there is just one

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. What is the long-term expected real interest rate? How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?
Please explain the correct answer(s). An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period, prices are expected to rise by 2 percent. Which statement(s) below is/are true? 1.I. 4 percent is the desired real risk-free interest rate. 2.II. 6 percent is the approximate nominal rate of interest required. 3.III. 2 percent is the expected inflation rate over the period. A) I only B) II only C) III only D) I and II only E) I, II, and III
It is sometimes suggested that the Federal Reserve should try to achieve zero inflation. If we assume that velocity is contant, does this zero-inflation goal require that the rate of money growth equal zero? If yes, explain why. If no, explain what the rate of money growth should equal
Suppose that an economy has a constant nominal money supply, a constant level of real output Y = 1500, and a constant real interest rate r = 0.05, and it’s expected rate of inflation is 2%, i.e, πe = .02. Suppose that the income elasticity of money demand is ηY = 0.5 and the interest elasticity of demand ηi = –0.2. (a) Suppose that Y decreases to 1425, r remains constant at 0.05 and there is no change in the expected rate of inflation. What is the percentage change in the equilibrium price level? (b) Suppose that r increases to 0.06 and Y remains at 1500. Assuming that expected inflation remains at πe = .02, what is the percentage change in the equilibrium price level? (c) Suppose that r increases to 0.06. Assuming that πe = .02, what would real output have to be for the equilibrium price level to remain at its initial value?
Economics Suppose that the effects of COVID-19 on the economy can be thought of as a permanent negative productivity shock, i.e., a permanent decrease of the production owing to lower total factor productivity. What does the model predict will happen to the following variables: (1) real interest rate, (2) real output), (3) real consumption, (4) real investment, (5) labor input? For each variable explain why COVID-19 would have the predicted effect.
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It is sometimes suggested that the Fed should try toachieve zero inflation. If we assume that velocity isconstant, does this zero-inflation goal require that therate of money growth equal zero? If yes, explain why.If no, explain what the rate of money growth shouldequal
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