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- In a particular economy the real money demand function is Real Interest Rate, r (%) 0.451 M 0.40- 3,000 + 0.10Y-9,000i. P 0.35- Assume that M = 7,000 and P = 2. Initially, expected inflation, zewas 0.02. Initially, when Y= 8000, the real interest rate of 0.013 cleared the asset market and when Y = 9000, the real interest rate of 0.024 cleared the asset market. The initial LM curve is drawn as 0.30- 0.25 0.20- LM,. 0.15- Now suppose that the expected inflation rate increases to 0.03. Using the new expected inflation rate, calculate the real interest rate that clears the asset market when Y = 8000. (Enter your answer in decimals, rounded to three decimals.) D. This is point C. 0.10- LM, 0.05- 0.00+ 7 8 10 Output, Y (thousands)C = 100 + 0.5 · (Y – T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is MY P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. 1. Suppose the government (not the CB) wants to stabilise the shock in the short-run. Explain whether it should increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), and how it works. 2. Now suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run. Explain whether it should decrease or increase money supply M if it wants to bring output Y back to…=0. An economy is described by the following equations: AD: SRAS: Okun's law: Y = 4000 + 2(M/P) Y = ybar + 100(P-P) (Y-ybar)/ybar =-2(u-ubar). Assume ybar 6000 and ubar=0.05. = A) Suppose that the nominal money supply has long been at M = 4000 and is expected by the public to remain constant forever. The equilibrium value of P is The equilibrium value of P is, The equilibrium value of Y is, The equilibrium value of u is The equilibrium value of x is, (2 points each) B) A totally unexpected increase in in the money supply occurs, raising it from 4000 to 5250. [Part B is for extra credit] The short run equilibrium value of P is The short run equilibrium value of Pe is_ The short run equilibrium value of Y is The short run equilibrium value of u is. The value of unanticipated inflation, which is defined as (P-P)/P, is, The value of the slope of the short-run Phillips curve is (2 points each)
- 1. IS-LM-AD Suppose the economy of Canada is governed by the following consumption function, investment function, and fixed values of government expenditure and taxes C =300 +0.6(Y-T), I =700- 80r, G =500, T =500. Further, suppose that the money demand function, money supply, and price level are given by =Y- 200r, М - 3000, P 2. (a) Compute the IS and LM curves, and plot these curves for interest rates ranging from 0% to 15%. Find the equilibrium levels of Y and r. (b) Suppose that the government increases expenditures to G = 700. What are the new equilibrium values of Y and r. What is the government expenditure multiplier? 500), compute the aggregate (c) For the initial levels of government expenditure (G demand curve. What is the level of aggregate demand when the price level is equal to 4? (d) Now consider the case where G increases to 700. What is the new level of aggregate demand when holding the price level equals 4? 1 (e) Suppose that investment is now more sensitive to…Calculate what happens to nominal GDP if velocityremains constant at 4 and the money supply increasesfrom $250 billion to $375 billionAssume that investment, government expenditures, taxes are autonomous.C = 2000 + 0.65* (Y-T)I = 900 – 50iG = 400T = 1500M = 1000P = 2L = 0.50Y-25ia.What is the value of the sensitivity money demand to the level of income?b.What is the value of the nominal supply?c.What expression represents the IS curve?d.What is the equilibrium interest rate, i*?e.What is the equilibrium income, Y*?
- Suppose the economywide demand for money is given by: M = P(0.2Y – 25,000i). The price level Pequals 3, and real output Y equals 8,000. At what value should the Fed set the nominal money supply if it wants to set the nominal interestrate at 2 percent?Suppose the money demand function is Md/P = 1000+ 0.2Y - 1000 (r + π²). and Y = 2000, r = .06, π = .04, and Ms is 2600. Suppose the real interest rate rises to 0.11, and expected inflation rises to 0.09, but Y and Ms are unchanged. What would the inflation rate be? Select one: a. 4% b. 10% O c. 6% d. 8%C = 100 + 0.5 - (Y – T) I = 200 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are G= 300, Ť= 200. The LM (money market equilibrium) curve is M Y 10i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is a“ = 0.02. Assume that the long-run equilibrium level of output is Y = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 -r Question 1 Derive the long-run equilibrium values of output Y, consumption C, private and public savings Sprivate and Spublie, investment I, the real and nominal interest rates (r, i) and price P, before and after the vaccine news shock. In particular: 1. Explain how the long-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from…
- If the demand for money depends positively on real income and depends inversely on the nominalinterest rate, what will happen to the price level today if the central bank credibly announces thatit will decrease the money growth rate in the future, but it does not change the money supplytoday?Suppose that the nominal interest rate is zero, that is, R= 0. a. In this case, in terms of real income Y and the price level P, the real equilibrium quantity of credit card balances isSuppose that the money demand function is(M/P)d = 1,000 - 100r, where r is the interest rate in percent. Themoney supply M is 1,000 and the price level Pis 2.a. Graph the supply and demand for real moneybalances.b. What is the equilibrium interest rate?c. Assume that the price level is fixed. Whathappens to the equilibrium interest rate if thesupply of money is raised from 1,000 to 1,200?d. If the Fed wishes to raise the interest rate to7 percent, what money supply should it set?