Macroeconomics (9th Edition)
9th Edition
ISBN: 9780134167398
Author: Andrew B. Abel, Ben Bernanke, Dean Croushore
Publisher: PEARSON
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Chapter 9, Problem 5AP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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Similar to how the quantity demanded for a good depends on its price, the quantity of money demanded depends on the cost of holding money, or the nominal interest rate (i). In addition to this, the demand for real money balances is also a function of income (Y). Using all of this information, suppose the demand for real money balances takes on the following functional form:
(M/P)dd=500 + 2Y – 9i
The Fisher equation relates the nominal interest rate to the real interest rate (r) and the expected rate of inflation (Eπ) when examining ex-ante (based on forecasts or 'before the event') effects. The equation ( (M/P)dd = 500 + 2Y – 9(Eπ – r)/(M/P)dd = 500 + 2Y – 9(r – Eπ) / (M/P)dd = 500 + 2Y + 9(r + Eπ) / (M/P)dd = 500 + 2Y – 9(r + Eπ) ) is equivalent to the function given for the demand for real money balances.
Suppose the central bank announces that it will increase the money supply in the future, but it does not change the money supply today. Complete the following…
In the basic New Keynesian model, if the central bank is initially achieving its goals, and the natural rate of interest rises, the central bank should
A.
increase the nominal interest rate by the amount of the natural real interest rate increase.
B.
reduce the nominal interest rate by the amount of the natural real interest rate increase.
C.
increase the nominal interest rate by less than the amount of the natural real rate of interest increase.
D.
reduce the nominal interest rate by less than the amount of the natural real interest rate increase.
E.
do nothing
Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship:
P=A×MP=A×M
•
P=Price LevelP=Price Level
•
M=Money SupplyM=Money Supply
•
A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time.
How might an economist gather empirical data to test the proposed relationship between money and the price level?
Chapter 9 Solutions
Macroeconomics (9th Edition)
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- Refer to Figure 11.1. All of the following events can cause a movement from Point E to Point A EXCEPT Group of answer choices an increase in real output and income. a decrease in the interest rate. an increase in the nominal aggregate output. an increase in the aggregate price level.arrow_forwardSuppose that the following system of equations describe the macroeconomy of a hypothetical country: Y= C(y)+I(i)+G : IS or goods market M/p=L(i,y) : LM or money market a) Get the total differentials of the above system of equations and put your answer in matrix representation. b) Taking money supply and government expenditure as exogenous and the price level as fixed, determine and provide economic intuition for the signs and magnitudes of the following multipliers i) dY/dG ii) di/dG c) For a simultaneous increase in both the interest elasticity of investment and interest elasticity demand for money parameters, determine the net effect on the values of the multipliers in part b). d) For a horizontal LM curve, determine the numerical values of your answers in part b) above if: Marginal propensity to consume=5/6 Tax rate=0.25 Interest elasticity of investment=5 Interest elasticity of demand for money=50 Income elasticity of demand for money=2arrow_forwardSuppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that the minimum wage increases to $15 in the United States, which affects the entire labor market and increases the cost of production. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants to keep prices in the economy as low as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."arrow_forward
- At the macroeconomic equilibrium, the economy has _______ gap, so to return to full employment _________. A. an inflationary; the money wage rate rises and aggregate supply increases B. a recessionary; the money wage rate falls and aggregate supply increases C. an inflationary; the money wage rate rises and aggregate supply decreases D. a recessionary; the money wage rate rises and aggregate supply decreasesarrow_forwardSuppose the economy's price level is 2 and real GDP is 30 , 000 for the year. Suppose the money supply is 5 , 000. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service? 10 8 12 16arrow_forwardPlease solve all the three Multiple choice questions mentioned below: 1. Question in the image: a. Not exist b. will be horizontal c. Upward sloping like the usual LM curve d. None of the above 2. If in the short run, IS LM equilibrium occurs at a level of income above the natural rate of output, in the long run the output will return to the natural rate via: a. an increase in the price level b. a decrease in the interest rate c. an increase in the money supply d. a downward shift in the consumption function 3. Suppose that there are two countries, B and C, that have no trade and no financial transactions with any other countries except each other. B imports a total of goods worth 10 million 'bollars' from C, where a bollar is a unit of B's currency. B has no exports. Which of the following must be true? a. B has a capital account deficit b. C has a current account deficit c. C is buying assets from B d. The exchange rate of collars per bollar is bigger than 1, where collar is C's…arrow_forward
- The interest-rate effect depends on the idea that increases in interest rates decrease the quantity of goods and services demanded. depends on the idea that increases in interest rates decrease the quantity of goods and services supplied. is responsible for the downward slope of the money-demand curve. is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.arrow_forwardSuppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy action demand for goods and services in the economy, leading to prices for products. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a unemployment level. Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to unemployment. 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.arrow_forwardIf the statement is false or uncertain, please correct the statement to make it true. If the statement is true, please explain your answer briefly. In a closed economy, adjustment in the nominal interest rate causes the simultaneous equilibrium in the product market and in the financial market.arrow_forward
- If money is neutral and the "Fisher" effect (named after Irving Fisher), an increase in the growth rate of money causes Question 24 options: both the nominal and the real interest rate rise. neither the nominal nor the real interest rate rise. the nominal interest rate rises, but the real interest rate does not. the real interest rate rises, but the nominal interest rate does not.arrow_forwardAssume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers decreases, but producers are not affected. Also in year 2, the cost of lumber used to build homes decreases. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point B after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point E after the change d The equilibrium will be at point E before the change in expectations and point A after the changearrow_forwardassume that the Federal Reserve decreases the supply of money to fight inflation. show the effect of this policy action on the market shown in the grapharrow_forward
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