EBK PRINCIPLES OF MACROECONOMICS
6th Edition
ISBN: 9780073534701
Author: Frank
Publisher: YUZU
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Question
Chapter 14, Problem 1RQ
To determine
Short run effect of increase in tax and long run effect of adjusting real interest rate.
Expert Solution & Answer
Explanation of Solution
When the tax rate increases, the disposable income of the people will decrease, which in turn reduce the aggregate demand and cause shift in the AD curve to the left. As a result, GDP also will fall, which will create a recessionary gap in the economy; in turn, the inflation rate will decrease. The firms sell lesser quantity of output than they are willing to sell, which causes a rightward shift in the short run
Suppose, the Fed decided to adjust the real rate of interest in which investment and savings are equal. In the economy, there is higher level of
Economics Concept Introduction
Aggregate demand (AD): Aggregate demand refers to the total value of goods and services that are demanded at a particular price in a given period of time.
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Students have asked these similar questions
In 2009, the U.S. economy was in a severe recession. The Federal Reserve had lowered the federal funds rate to about 0 percent, but still wanted to stimulate the economy more. The inflation rate in 2009 was about –1%, but households’ and businesses’ inflation expectations for the upcoming year were higher and positive, about 1.5%. a)First, do households’ and businesses’ investment demand depend on the ex ante or ex post real interest rate? Briefly explain why.
b)Draw an IS-MP diagram that’s consistent with the state of the U.S. economy in 2009. Make sure that your IS and MP curves intersect in a place that is consistent with the setup of the problem, above. In particular, do your IS and MP curves intersect on the flat part of the MP curve, or the upward-sloping part? And do your IS and MP curves intersect at a positive real interest rate or a negative real interest rate?
c)Suppose that the U.S. Congress and President pass a fiscal stimulus package that increases government spending.…
Assume the fiscal authority reduces taxes and, at
the same time, the central bank engages in a
contractionary monetary policy action. Taken
together, how will these actions affect the
equilibrium values of aggregate income and the
real rate of interest?
Suppose you have the following information on the Fed's and the European Central Bank's (ECB) policy rules:
Fed real interest rate = 0.5x (inflation - 2)
ECB real interest rate = 0.2 x (inflation -2) +1
If the inflation rate is 2 percent in each, what will be the real interest rate in the U.S. and the ECB area?
Real interest rate in the U.S. =%
Real interest rate in the ECB area =
Chapter 14 Solutions
EBK PRINCIPLES OF MACROECONOMICS
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