Suppose that the government conducts expansionary fiscal policy and increases spending to 200. What will be the effect on the economy? Assuming central bank 1)hold interest rate at 0.1 and 2) allow the interest rate to change. Illustrate
Q: If the central bank sells government securities from the private sector-money markets, other things…
A: Open market operation refers to the sale and purchase of the government securities to regulate the…
Q: Money supply versus interest rate targets. assume that the economy's real GDP is growing. a. What…
A: Hi, thank you for the question. As per the Honor code, we are allowed to attempt only first tree sub…
Q: What will happen in the bond market if the government imposes a limit on the amount of daily…
A: If the government imposes a limit on the quantity of daily transactions within the bond market, then…
Q: a. What is the demand for central bank money? b. Find the equilibrium interest rate by setting the…
A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…
Q: Suppose that money demand is given by Md = $Y(0.45 – 0.4i) where SY is $90. Answer the Following…
A: the money supply refers to the total volume of money held by the public at a particular point in…
Q: 2.4 Use the money demand and money supply model to show graphically and briefly explain the effect…
A: Money demand is the total amount of money that an economy wants to hold. Money supply is the total…
Q: Explain the main role of the central bank in the economy. In the discharge of it's important…
A: The bank that is considered to be one of the largest and oldest commercial banks that is being…
Q: Suppose that the Central Bank is able to target real GDP when there is instability in either good…
A: Investment is one of the factors that is assumed to be determined by the rate of interest in a…
Q: The money market is in equilibrium when the supply of money (Ms) equals the demand for money (Md).…
A: Money demand: Md = 650 - 150r Money supply: Ms = 350 The money market equilibrium occurs at the…
Q: Recall the Application about the Fed's response to the collapse of the investment house Bear Steams…
A: Monetary policy is the policy taken by the central authority to control the nation's money…
Q: The central bank buys $3,000 worth of bond in the open market ) How will the change in the money…
A: The open market operation is the tool used by central bank of country to change the money supply in…
Q: When the central bank decides to increase the discount rate, the: interest rates decrease. interest…
A: Answer to the question is as follows :
Q: Suppose that the Central Bank is able to target real GDP when there is instability in either…
A: Real GDP is a macroeconomic measure of the value of economic output that has been adjusted for price…
Q: An economy is sluggish because its impotent govemment has been imposing many inappropriate policies…
A: A sluggish economy is one in which macroeconomic growth is modest to non-existent.
Q: ompare the Keynesian and Monetarists theories. Describe why they disagree with each other over how…
A: Comparison between the Keynesian and Monetarists theories. Factors Monetarist theories…
Q: Assume GDP is currently $10,800 billion per year and the quantity of money is $540 billion. a.…
A: Assume GDP is currently $10,800 billion per year and the quantity of money is $540 billion. a. What…
Q: Suppose government spending increases. Would the effect on aggregate demand be larger if the central…
A: Meaning of Aggregate Demand: The term aggregate demand refers to the situation under which the…
Q: Recall the Application about the Fed's response to the collapse of the investment house Bear Steams…
A: For answering this question we have to consider each of the options separately.
Q: QUESTION Consider the model of money demand we saw in class. Let the elasticity of money demand with…
A: Elasticity of money demand refers to the rate of change of money demand with respect to income or…
Q: a) Explain the lender of last resort (LOLR) function of central banks. Provide some examples of the…
A: One of the most significant and essential functions of a central bank is to manage the country or…
Q: Let’s consider a hypothetical economy where this year’s money supply is Tk.400, nominal GDP is Tk.…
A: Given : money supply = Tk.400 nominal GDP = Tk. 25000 real GDP = Tk. 5000. We have Price = Nominal…
Q: Solve the attachment
A: In the given graph, it is given that the hypothetical representation of the long-run equilibrium of…
Q: what will happen to the interest rate vs quantity of money if the federal decides to decrease money…
A: The economies around the world tend to have many entities, which undertakes various economic, and…
Q: 2. Suppose an oil field is discovered, which curve(s) in the AD-AS graph will shift to which…
A: The AD-AS or total interest total stockpile model is a macroeconomic model that makes sense of value…
Q: If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium?
A: The actions undertaken by the monetary authority of an economy, usually the central bank, to promote…
Q: Explain the links between changes in the nation’s money supply, the interest rate, investment…
A: Contractionary MP is adopted to reduce the supply of money(Ms) in the economy. It uses its tools to…
Q: In the Country A, the velocity of money is constant. The growth rate of real GDP is by 6% per year,…
A: According to Fisher's quantity theory of money, there is a direct relationship between the quantity…
Q: With the help of theory of liquidity preference describe, ‘why an increase in the money supply…
A: The theory of liquidity preference states that people demand money in order to remain liquid and…
Q: than the quantity of bonds interest rates until the money market reaches its After the decrease in…
A: The interest rate is the cost of money, according to the Liquidity Preference Theory. Simply put,…
Q: The following equation is a money demand function Md /P = f(y,I) a. Explain the equation b. Show…
A: it is LM equation where it shows that money supply is directly proportional to the output produced…
Q: Explain what the theory of money is in words and mathematical expressions, and then relate this…
A: The quantity theory of money holds that price changes are related to changes in the money supply. It…
Q: A central bank carries out a contractionary open market operation. (a) What precisely does the…
A: Meaning of Macroeconomics: The term macroeconomics refers to the situation of economic and…
Q: Which of the following refers to the federal funds rate (FFR) (choose one)? A. Interest rate on a…
A: The central bank of a nation is considered to be the backbone of the financial sector of every…
Q: During the third quarter of 1997, Japanese GDP was falling at an annual rate of over 11 percent.…
A: The actions by the monetary authorities/government to either expand or tighten the economy in terms…
Q: e. Expanded use of online payments reduces the amount of money people want to hold. The central bank…
A: Consider the below points: *Is curve shows the inverse relationship between the interest rate and…
Q: A hypothetical economy is having currency in circulation of $100m, and deposits of $400m. Assume…
A: The problem has been solved as follows:
Q: The demand for money is given by Md = $Y (0.3-i), where $Y = 120 and the supply of money is $30.…
A: Money market The quantity of financial assets that individuals seek to hold in the form of money is…
Q: A central bank carries out a contractionary open market operation *Another way of achieving the…
A: Monetary policy is the policy that the central bank of a country undertakes to control and influence…
Q: Assume that the central banks (bog) primary goal is to correct a weak economy. how can it use open…
A: Central bank of any country is responsible for its monetary policy, which includes three major…
Q: • Given following information: Y = 4000 - 200i The IS equation Ms/P = 2000 Vertical LM • Calculate…
A: Note: We’ll answer the first question since the exact one wasn’t specified. Please submit a new…
Q: The Federal Reserve's next move on the federal funds rate is likely to be a hike in the rate created…
A: Macroeconomics is a part of economics that deals with production, decision and allocation concerning…
Q: the importance of the Central Bank in the financial market
A: Central Bank: The central bank plays a vital role. It monitors and regulates the working of the…
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
- On June 5, 2003, the European Central Bank acted to decreasethe short-term interest rate in Europe by half a percentagepoint, to 2 percent. The bank’s president at the time, WillemDuisenberg, suggested that, in the future, the bank could reducerates further. The rate cut was made because European coun-tries were growing very slowly or were in recession. What effectdid the bank hope the action would have on the economy? Bespecific. What was the hoped-for result on C, I, and Y?Assume that investment, government expenditures, taxes are autonomous.C = 2000 + 0.65* (Y-T)I = 900 – 50iG = 400T = 1500M = 1000P = 2L = 0.50Y-25ia.What is the value of the sensitivity money demand to the level of income?b.What is the value of the nominal supply?c.What expression represents the IS curve?d.What is the equilibrium interest rate, i*?e.What is the equilibrium income, Y*?Consider the following IS-LM model:C=200+0.25YdI=150+0.25Y-1000iG=250T=200Real Money Demand=M/P=2Y-8000iReal Money Supply=1600a. Derive the IS relation.b. Derive the LM relation.c. Solve for equilibrium real output and interest rate and show it in a graph, draw IS and LM curves.d. Solve for values of C, G and I and verify that they add up to Y you obtained in part c.e. Now suppose that the money supply increases to M/P=1840. Solve for Y, i, C and I and describe inwords the effects of an expansionary monetary policy. Show the change in a graph.f. Set M/P to its initial value of 1600. Now suppose that government spending increases to G=400.Summarise the effects of an expansionary fiscal policy on Y, i, C. Use a graph to show the shift in ISand/or LM.
- Suppose the economy of Macroland is described by the following:C = 200 + 0.8 DI (DI = disposable income)I = 300 + 0.2Y − 50r (Y = GDP)(r, the interest rate, is measured in percentage points. For example, a 9 percent interest rate is r = 9).For this economy, assume that the Federal Reserve uses its monetary policy to peg the interest rate atr = 5G = 750T = 0.25YX = 200M = 150 + 0.2YHint: DI = Y − T From Table 36-1, find the trade deficit or surplus. a. 75 surplus b. 475 surplus c. 475 deficit d. 75 deficitPart C D A housing bubble has burst, causing a negative wealth effect. Use the IS-LM model to answer the following: a) What happens to output and the real interest rate? Draw an IS-LM diagram to illustrate your answer. Begin with the economy at full employment output. Be sure to include the FE line in your diagram. b) What sort of fiscal policy is appropriate to restore full employment output? State specifically what the government should do. (Do not add this to your diagram.) c) What sort of monetary policy is appropriate to restore full employment output? State specifically what the central bank should do. (Do not add this to your diagram.) d) Suppose neither the government nor the central bank take any action. How will the economy return to full employment output? Add this to your diagram.c) Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate, and, if either, what is the amount? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?
- 1) The IS-LM Model a) In the IS/LM model explain what happens to equilibrium output and interest rate if governmentsimultaneously pursues expansionary fiscal policy and the central bank opts for a contractionarymonetary policy. Show with the help of a graph along with a very brief verbal explanation. b) Label the statements below as true or false and give a brief explanation for false statementsonly. i) For a given level of P (price), if M (nominal money) increases by 10%, M/P also increases by10% ii) A monetary expansion leads to a lower output and a higher interest rate. iii) Equilibrium in the financial market implies that an increase in income leads to a decrease ininterest rate making the LM curve downward sloping. c) Assume a model economy with the following parameters:C= 100 + 0.25 YD ; I= 100 + 0.5Y - 3000iG= 125 ; T= 100 ;(M/P)d = 6Y - 24000i ; (M/P)s = 4500Derive the IS and LM relation. 2) The short and medium run a) Suppose that the mark-up of goods prices over marginal…Suppose that the money demand function is(M/P)d = 1,000 - 100r, where r is the interest rate in percent. Themoney supply M is 1,000 and the price level Pis 2.a. Graph the supply and demand for real moneybalances.b. What is the equilibrium interest rate?c. Assume that the price level is fixed. Whathappens to the equilibrium interest rate if thesupply of money is raised from 1,000 to 1,200?d. If the Fed wishes to raise the interest rate to7 percent, what money supply should it set?1- If government expenditure (∆G) is increased by AED 400, and tax (∆T) has also increased by AED 400, Marginal propensity to save is given as 0.25, what would the increase in National Income (∆Y)? 200 300 400 500 2- For an economy, the central bank has increased the money supply, what would happen to LM curve? It will shift to right It will shift to left It will not shift None of the options are correct 3- Which of the following sequence of events follows an contractionary fiscal policy? Increase in government expenditure and tax Decrease in tax and government spending Decrease in government expenditure and increase in ta Increase in government spending and decrease in Tax 4- Suppose for an economy following information is given. Consumption (C) = 40+0.75(Yd), Tax (T) = 80 Million AED ; I= 140-10r; Government spending (G) =100; Money demand = 0.2Y -5r ; Money supply = 85 million AED. a. Compute the equilibrium Income Y and rate of Interest (r) ? b. Suppose…
- A Explain the Keynesian transmission mechanism, and use graphs to illustrate B Suppose that there is an increase in the demand for money Explain fully how this changes the equilibrium interes! rate and GDP Use graphs to illustrate. Consider the following IS-LM model (all amounts are in millions of dollars): C = 50 + 0.6 YD T = 20 G = 300 I = 450 + 0.2 Y - 1500 i Derive the IS equation in the form Y = function (i, ….). The central bank sets an interest rate of 10%. What is the full SR model eqm Y? Use (M/P)d=3Y– 4000i to calculate what the real Ms is at this full SR eqm. Graph this eqm in 3 separate graphs: i-Y, i-(M/P), and Z-Y spaces. You may link these graphs up or leave them separate. Suppose Congress decides to decrease G from 300 to 295, cet. par. Provide a specific $ amount for the new eqm Y. Show this “shock,” with its appropriate name, in the 3 graphs of part b. above. Present and discuss all changes in all components of IS and LM using…Labor Market Y = α (5N – 0.0025N2), where α = 2; N = labor The supply of labor, NS isNS = 55 + 10(1-t)w where t- tax rate = 0.5, w = real wage rate Good Market The desired consumption, Cd is Cd = 300 + 0.8(Y – T) – 200rWhere Y = income, T = taxes, r = real interest rate T= 20 + 0.5YG= 50Desired investment, Id:Id = 258.5 – 250r Money Market Demand for money, Md/P: Md/P = 0.5Y – 250(r + πe), where πe = 0.02 (expected inflation) Money supply = Ms = 9150 a)Find the equilibrium w, Y and N.b)Find the IS-curve and the equilibrium r, C and I.c)Find the LM-curve and the equilibrium P.d)If G increased to 72.5, find the equilibrium w, P, N, r, C and I.e)Discuss the differences between the equilibrium values in d) with a), b) and c). What is your conclusion with regard to the effectiveness of fiscal policy in this model?