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- With the help of theory of liquidity preference describe, ‘why an increase in the money supply lowers the interest rate’?Give typing answer with explanation and conclusion Suppose that actual inflation is 4 percent, the Fed's inflation target is 2.5 percentage points, and unemployment rate is 3.5 (which is 0.5 percent below the Fed's full-employment target of 4 percent). According to the Taylor Rule, what value will the Fed want to set for its targeted interest rate?The Fed argued that QE3 would work to reduce the unemployment rate. Use the federal funds market, the AD-AS model, and the yield curve, show and explain how QE3 was supposed to impact short and long term interest rates, as well as P, Y, and N according to the Fed. Discuss why QE3 may not work as advertised. In other words, what are the limitations of QE?
- Using the supply of money diagram (s), explain and demonstrate diagrammatically what happens to the interest rate, consumption, investment and aggregate demand, if the Central Bank sells government bonds to the public.Briefly explain whether and if so how an increase in taxes affects the (i) IS curve, (ii) the LM curve, and (iii) the Phillips curve. "Expansionary monetary policy becomes becomes particularly im- portant if the economy is in a liquidity trap" Is this statement correct? Explain your answer.The following set of equations describe an economy: C = 15,000+0.5(r-T)-50,000 rl^P = 10,000 - 25,000 г G = 8,000 NX = 2,600 T = 8,200 Y^* = 46,800 a. Find a numerical equation relating planned aggregate expenditure to output and to the real interest rate. PAE = b. At what value should the Fed set the real interest rate to eliminate any output gap? (Hint Set output Y equal to the value of potentia output given above in the equation you found in part a. Then solve for the real interest rate that also sets planned aggregate expenditure equal to potential output.) Instructions: Enter your response as a whole number. Real rate of interest:
- 7 The government cuts taxes. Which curve shifts in the IS-LM model? To the left or to the right? What is the effect on the interest rate? How should the Fed do to keep the interest rate unchanged?We have study the Liquidity Preference Theory. Discuss the import points that are against this theory or write the Criticism of Liquidity Preference Theory?I'm so confused on this question. Wouldn't the second option be correct?. apparantly not. The answer is d. an increase in the money supply will lower the interet rate, decrease aggregate demand, and increase real output. Like why does on my textbook says "expansionary monetary policy raises real output towards its potential level by increasing money supply and decreasing interest rates" under Breif Review.Please explain and help me.
- short answer If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium?. (Money Supply Versus Interest Rate Targets) Assume that the economy’s real GDP is growing. What will happen to money demand over time? If the Fed leaves the money supply unchanged, what will hap- pen to the interest rate over time? If the Fed changes the money supply to match the change in money demand, what will happen to the interest rate over time? What would be the effect of the policy described in part (c) on the economy’s stability over the business cycle?Explain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.
