The interest rate effect states that as the aggregate price level decreases, all else equal, people demand, money, which drives the interest rate and investment O more; up; down less; down; up more; down; down less; up; down
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- The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the puce of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?An economy is described by the following equations: C= 2,600+ 0.8(Y-T) - 10,000r IP = 2,000-10,000r G = 1,800 NX = 0 PAE = C+1²+ GANX T = 3,000, Where the definitions of each variables are the same as our lecture notes. The real interest rate, r, expressed as a decimal, is 0.10 (that is, 10 percent). a. Find a numerical equation relating planned aggregate expenditure to output. b. Solve for short-run equilibrium output. c. Show your result graphically using the Keynesian-cross diagram. d. Now, suppose that potential output Y* equals 12,000. What real interest rate should the Fed set to bring the economy to full employment? e. Recalculate question (d) for the case in which potential output Y* equals 9,000.Starting from general equilibrium, what would be the long-run effects of a simultaneous reduction in government purchases (G↓) and increase in the money supply (M↑) designed to leave real GDP the same on each of the following economic variables? For each, you should write one of the following responses: Up (U), Down (D), orSame (S) The real interest rate (r) Investment (I) Consumption (C) The price level (P) Budget deficit (G – T) Future standard of living (i.e., future per capita consumption)
- Both the portfolio choice and Keynes’s theories of thedemand for money suggest that as the relative expectedreturn on money falls, demand for it will fall. Whydoes the portfolio choice approach predict that moneydemand is affected by changes in interest rates? Whydid Keynes think that money demand is affected bychanges in interest rates?Starting from general equilibrium, what would be the long-run effects of a simultaneous reduction in government purchases (G↓) and increase in the money supply (M↑) designed to leave real GDP the same on each of the following economic variables? For each, you should write one of the following responses: Up (U), Down (D), orSame (S) The real interest rate (r) Investment (I) Consumption (C) The price level (P) Budget deficit (G – T)If the price level goes down, the equilibrium interest rate will: a) decrease b) be ambiguous c) not change d) increase
- Respond the following statements by explaining whythey are true or false. For each statement, a complete and correct explanation 1. Business cycles are the periodic peaks and troughs of the financial industry and real estate (FIRE)sector of the economy. 2. Consumption of nondurables is more volatile than GDP, that is, it has a higher standard deviation, becausepeople like to take risks, so their consumption in nondurables varies more than their income month-tomonth. 3. Investment is countercyclical because, when GDP increases, consumption increases andinvestment falls. 4. Unemployment is countercyclical because the unemployment rate is negatively correlated withGDP.i neeed it in word form.. not handwrittten Explain, with the aid of three separate IS-LM-FE diagrams, how a decrease in government purchases will affect real output, real interest rate and the general price level in three steps:(i) before the general price level adjusts;(ii) when the general price level is adjusting;(iii) after the price adjustment process is completed.Is the general price level increasing or decreasing during the price adjustment process? Explain the intuition of your answer with reference to the AD-AS framework.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 deficit
- “The appreciation of the dollar from 2012 to 2017 had anegative effect on aggregate demand in the United States.” Isthis statement true, false, or uncertain? Explain your answer.The Short-Run Aggregate Supply Curve (AS) is given by: y=20pAnd the Short-Run Aggregate Demand Curve (AD) is given by: y=25,000−20p Suppose instead that the Central Bank wanted to take action to keep the price-level completely stable. This would entail keeping it constant at its current rate. Suppose also that the Central Bank targets the interest rate directly. Suppose also that: • The Marginal Propensity to Spend is 0.75. • Every 1% increase in the interest rate leads to a decrease in Autonomous Consumption of 250 and a decrease in Autonomous Investment of 250. How much would the Central Bank need to change the current interest rate in order to keep the price level from changing through the medium-term as this output gap closes in the economy?Consumption, ? = 0.8?? + 80,Tax, ? = 0.3? + 10Investment, ? = −30r + 800Money supply, ?s = 8000 andMoney demands: ?1 = 0.2?, ?2 = −20? + 4000i. Determine the values of national income, ?, and interest rate, ?, on the assumption thatboth the commodity and the money markets are in equilibrium.ii. Identify the autonomous components and induced components among the aboveequations. Explain the reasons why the components have been identified as autonomousor induced.