Suppose you observe the time series of output y and real money supply M/ P reported in the Figure below. Nominal money supply M is under full control of the Central Bank. Output y Real Money Supply M$/P Time t Time t 1 4 1 3 4 6. Interpret these time series using the ASAD Redux model with workers misperceptions (Lecture Notes, Chapter 1). Assume that the time paths are caused by a single permanent shock hitting the economy at time t = 1, and interpret time t = 6 as the medium run. Your general task is to guess what type of shock can be responsible for the observed time series. Answer each of the following questions, providing clear motivation for your statements: (a) Can the shock be a permanent change, positive or negative, in public expenditures G? Motivate your answer. (b) Can the shock be a permanent change, positive or negative, in nominal money supply M ? Motivate your answer. (c) Can the shock be a permanent change, positive or negative, in firms productivity 1 ? Motivate your answer. (d) Can the shock be of a permanent change, positive or negative, in the slope of labour supply B? Motivate your answer. Add any further considerations that you think can be relevant to this exercise.

Suppose you observe the time series of output y and real money supply M/ P reported in the Figure below. Nominal money supply M is under full control of the Central Bank. Output y Real Money Supply M$/P Time t Time t 1 4 1 3 4 6. Interpret these time series using the ASAD Redux model with workers misperceptions (Lecture Notes, Chapter 1). Assume that the time paths are caused by a single permanent shock hitting the economy at time t = 1, and interpret time t = 6 as the medium run. Your general task is to guess what type of shock can be responsible for the observed time series. Answer each of the following questions, providing clear motivation for your statements: (a) Can the shock be a permanent change, positive or negative, in public expenditures G? Motivate your answer. (b) Can the shock be a permanent change, positive or negative, in nominal money supply M ? Motivate your answer. (c) Can the shock be a permanent change, positive or negative, in firms productivity 1 ? Motivate your answer. (d) Can the shock be of a permanent change, positive or negative, in the slope of labour supply B? Motivate your answer. Add any further considerations that you think can be relevant to this exercise.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter24: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 3CQQ

See similar textbooks

Similar questions

Suppose two countries have identical aggregate demandcurves and potential levels of output, and g is the samein both countries. Assume that in 2019, both countriesare hit with the same negative supply shock. Given thetable of values below for inflation in each country, whatcan you say, if anything, about the credibility of eachcountry’s central bank? Explain your answer.Country A Country B2018 3.0% 3.0%2019 3.8% 5.5%2020 3.5% 5.0%2021 3.2% 4.3%2022 3.0% 3.8%
Now, consider an economy in which the demand for money is of the formY(1 + it)for t = 0, 1, 2, · · · , where output is 150 and it denotes the nominal interest rate inperiod t. The REAL INTEREST RATE, denoted r, is constant and equal to 4%. In period0 and 1, the money supply is 100 and people expect that money supply wouldbe 100 forever. People have rational expectations. In period 2, the central banksurprises people and sets the money supply will grow at 2 percent forever, that is,M0 = 100, M1 = 100, M2 = (1.02)M1, M3 = (1.02)M2, and so on. A. Find the inflation rate, nominal interest rate, real money balance in period 1,and expected inflation in period 2, given the information available in period1, π1, i1,M1 / P1, and, E1π2. B. Find the inflation rate, nominal interest rate, real money balance in period 2,and expected inflation in period 3, given the information available in period 2. (π2, i2, M2 / P2 and E2π3.) C. Find the inflation rate, nominal interest rate, and real money…
Now, consider an economy in which the demand for money is of the formY / (1 + it) for t = 0, 1, 2, · · · , where output is 150 and it denotes the nominal interest rate inperiod t. The real interest rate, denoted r, is constant and equal to 4%. In period0 and 1, the money supply is 100 and people expect that money supply wouldbe 100 forever. People have rational expectations. In period 2, the central banksurprises people and sets the money supply will grow at 2 percent forever, that is,M0 = 100, M1 = 100, M2 = (1.02)M1, M3 = (1.02)M2, and so on. A . Find the inflation rate, nominal interest rate, real money balance in period 1,and expected inflation in period 2, given the information available in period1, π1, i1, M1 / P1 and, E1π2. B . Find the inflation rate, nominal interest rate, real money balance in period 2, and expected inflation in period 3, given the information available in period 2, π2, i2, M2 / P2 and E2π3. C . Compare E1π2 and π2.
Which monetary policy tool can the Federal Reserve use to conduct an expansionary monetarypolicy (please state at least one instrument)? Which monetary policy instrument can the Fed useto conduct a restrictive monetary policy? Assume the country is experiencing highunemployment and a recession, such as during 2001, 2008-2009, and 2020. What is the Fedlikely to do in this scenario? Discuss the effects of such policy on the economy. Can you givea specific example to what the Fed did during any of those recessions? This is not a writing, it is economic.
Suppose the monetary authority on Ferenginar wants to know about the relationship between money growth and inflation. You decide to use the Quantity Theory of Money in terms of percentage changes, which is given by%∆Mt + %∆Vt = πt + %∆yt (a) Suppose the income elasticity of demand for money is equal to 1, andoutput is independent of monetary policy. If %∆Mt=5%, what is inflation (πt)? (b) Suppose that the income elasticity of demand for money is 1, and output is not independent of monetary policy. If Inflation is 3%, and %∆Mtis 2%, what is output
The supply of credit cards is given by q = 1400X, where X are real credit card balances, q isthe real price of the credit card balance. You also know that R = 0.05 (nominal interest rate)and P = 100. Answer the following questions about this:(a) If the money supply is M s= $5, 000, if P = 100 is the equilibrium price level, find Y (realoutput).(b) Suppose that the Federal Reserve Bank decides to increase the money supply by 10%.How much is the inflation rate as a result? Explain and justify your answer. (c) Further suppose that at the same time, real output, Y , increases by 10%. Now what isthe inflation rate? Does our quantity theory of money hold here? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
As a manager of a firm, you are concerned about the rise of inflation rate from 3 to 5 percent(annualized) over the last four months despite the growth of the economy.a. Given the above situation should BNM adjust the monetary policy? Is so, explain theappropriate monetary policy BNM would use. Be sure to discuss how the monetarypolicy would be able to manage inflation while managing economic growth.
Assume the following IS-LM model: expenditure sector: money sector: AD = C + I + G + NX I = 300 - 20i M = 700 C = 100 + (4/5)YD G = 120 P = 2 YD = Y - TA NX = -20 md = (1/3)Y + 200 - 10i TA = (1/4)Y By how much will the equilibrium level of income (Y) and the interest rate (i) change, if the Fed responds to an increase in government purchases of 160 by increasing nominal money supply to M' = 1,100?
All of the major orthodox approaches to macroeconomics presume that money is neutral at least in thelong run, although it might not be neutral in the short run. On the other hand, most heterodoxapproaches argue that money cannot be neutral. Compare and contrast these approaches to monetaryneutrality. Be sure to include a discussion of the positions taken by the following schools of thought:New Classical, Real Business Cycle, New Keynesian, Post Keynesian, and Institutionalist.
As monetary policymakers become more concernedwith inflation stabilization, the slope of the aggregatedemand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curvehelp stabilize inflation when the economy is hit with atemporary negative supply shock? How does this affectoutput? Use a graph of aggregate demand and supply todemonstrate.
Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000iG = 250 T = 200 i = .05 a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. e. Now suppose that the central bank cuts the interest rate to 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary monetary policy. What is the new equilibrium value of M/P supply? f. Return to the initial situation in which the interest rate set by the central bank is 5%. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary…
1. Assume that a country’s economy is in a short-run equilibrium and the actual unemployment rate is lower thanthe natural rate of unemployment.(a) Using a correctly labeled graph of the long-run aggregate supply curve, short-run aggregate supply curve,and aggregate demand curve, show each of the following.(i) Current price level, labeled PL1, and current output level, labeled (b) What open-market operation can the country’s central bank use to move the economy toward its long-runequilibrium?(c) Use a correctly labeled money-market graph to show how the country’s central bank action to move theeconomy toward its long-run equilibrium affects the equilibrium nominal interest rate in the short run.(d) Based on the interest rate change from part (c), will each of the following increase, decrease, or remain thesame in the short run?(i) Real output. Explain.(e) Assume instead that the central bank does not pursue the monetary policy action from part (b) and there wasno other government…