Discuss briefly the liquidity preference theory (LFT) and differentiate it from the loanable funds (classical) model of interest rate determination.
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- Discuss briefly the liquidity preference theory (LFT) and differentiate it from the loanable funds (classical) model of interest rate determination.
- Differentiate the equation of demand for real money balances in the Keynesian model based on the LFT from the equation of demand for real money balances in the classical model based on the quantity theory of money, by providing their respective money demand equations.
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- Consider a consumption function of C = 0.75 (Y – T). a) If government spending increases by $300 and there is a tax hike of $500 to fund this increase, according to the IS-LM model will the IS curve shift up or down and by how much?b) Considering your shift in the IS curve from part a, how should the Federal Reserve adjust the money supply if they want to keep interest rates constant?Suppose that the IS and LM relations are IS: Y=C(Y-T)+1(Y, r+x)+G LM: r=r netary policy: financial policy and quantitative easing Interpret the interest rate as the federal funds rate adjusted for expected inflation, the real policy interest rate of the Federal Reserve. Assume that the rate at which firms can borrow is much higher than the federal funds rate, equivalently that the premium x. in the IS equation is high Faced with a zero nominal interest rate, suppose the Fed decides to purchase securities directly to facilitate the flow of credit in the financial markets. This policy is called quantitative easing. If quantitative easing is successful, so that it becomes easier for financial and nonfinancial firms to obtain credit, what is likely to happen to the premium? Show the effect of quantitative easing in an IS-LM diagram. Use the line drawing tool to show show the effect Property label your line. Carefully follow the instructions above, and only draw the required object. If…According to the Liquidity Preferences Model, these are the expected first impact (short run) coming from an increase of Money Supply, EXCEPT: Question 4 options: Increase in Demand for Bonds. Increase in Money in circulation Decrease in Nominal Interest Rates Increase in economic activity.
- Consider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?In the IS/LM model, if the Keynesian expenditure multiplier is 2.76, the investment sensitivity to interest rates is 10, the income elasticity of money demand is 0.2 and the interest rate elasticity of money demand is 3, then the monetary policy multiplier with respect to income is 3.2 -0.12 0.12 -3.2Consider the following closed economy in the context of the IS-LM model. The consumption function (C), the investment function (I), government purchases (G), taxes (T), the money demand function (MD), money supply (M) and the price level (P) are given as: C = 500 + 0.75(Y - T)I = 1000 - 300?G = 1000T = 1200MD = 0.5Y - 200rM = 5000P = 2 (a) Write down the equations for the IS curve and LM curve. Show your workings. (b) Solve for the short-run equilibrium output and interest rate. (c) Suppose government purchases falls, with ΔG=-175. (i) Using the Keynesian cross model, calculate the change in equilibrium output. (Hint: Use the government purchases multiplier.) (ii) Would your answer be the same if you calculate the change in equilibrium output using the IS-LM model? Briefly explain your answer. (e) Suppose the price level falls. Using an appropriate IS-LM diagram, illustrate the short-run impact of the fall in price level on the equilibrium interest rate and output. No written…
- Q7.On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 4, 2020) decided tokeep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent.Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. Assess the present liquidity scenario in India and give your opinion about the impact of this reduction on money supply and also suggest other measures that RBI can take in recent times to maintain liquidity.Outline the main concepts of the Liquidity Preference Theory proposed by John Maynard Keynes and discuss its applicability to the Caribbean region.Let the IS equation be: Y = A/(1-b) – [g/(1-b)]i, where (1-b) is the marginal propensity to save, g is the investment sensitivity to interest rates, and A is an aggregate of exogenous variables. Let the LM equation be: Y = M0/k + (l/k)i, where k is the income sensitivity of money demand, l is the interest sensitivity of money demand, and M0 denotes real money balances. If b = 0.7, g = 100, A = 252, k = 0.25, l = 200, and M0 = 176, do the following operations: a. Write the IS-LM equation in matrix form. b. Solve for Y and I by matrix inversion. c. Solve for Y and i by Cramer's Rule. 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.
- Central bank has the following loss function:L=−(yt −ye)+β(πt −πT )2 (13.1) Consult Chapter 13 to answer the following questions: (a) What can we interpret about the central bank’s preferences from this loss function (Equation 13.1)? (b) Briefly explain how this loss function compares to the standard loss function and a loss function with yT > ye. (c) Find the inflation bias for a central bank with this loss function (Equation 13.1). [Hint: see Section 4.6 in Chapter 4].Consider the economy of Carrot Republic which is characterized by the following IS-LM model: IS equation: Y = C(Y - T) + I(Y, r + x) + G LM equation: r =r Note: the policy rate is the real interest rate which can be interpreted as the federal funds rate adjusted for expected inflation. The interest rate that the firms can borrow (r + x) is much higher than the fed funds rate. x is the risk premium. a. (Financial policy) Suppose that the government takes action to improve the solvency of the financial system. If the government's action is successful and banks become more willing to lend - both to one another and to non-fınancial firms - what is likely to happen to the premium? What will happen to the IS-LM diagram? Answer: The risk premium is likely to [ Select ] v. The [ Select ] curve will shift [ Select] This will [ Select ] output. Investment [ Select ] This financial policy can be thought of as a sort of macroeconomic policy. b. (Quantitative easing) Faced with a zero nominal…Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y-T) 500 - 10r I M P = = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, / is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate. d) If the Central Bank intends to pursue monetary policy in order to restore output to the same level before the fall in consumer confidence, how much should money supply change by? Use graphs to show the change in the economy and explain very carefully the monetary transmission mechanism e) Suppose that, the government intends to take an active role in restoring the economy to the original equilibrium by pursuing an expansionary fiscal policy. How much should government spending change by? With the help of graphs, explain very carefully, the impact of this policy on the economy.