PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 15, Problem 7P
Suppose that a permanent increase in oil prices both creates an inflationary shock and reduces potential output. Use an AD-AS diagram to show the effects of the oil price increase on output and inflation in the short run and the long run, assuming that there is no policy response. What happens if the Fed responds to the oil price increase by tightening
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It is time to take control of the Federal Reserve, which controls the U.S. money supply (M). In this chapter, we are thinking only about the “long run,” so real GDP (Y ) is out of the Fed’s control, as is velocity (v). The Fed’s only goal is to make sure that the price level (P) is equal to 100 each and every year. That is just known as “price stability,” one of the main goals of most governments. Fill in the missing values of M for the table.
Year
M
v
=
P
Y
1
25,000
2
100
500
2
4
100
500
3
4
100
400
4
4
100
200
5
2
100
400
6
1
100
600
Year 2, M =
Year 3, M =
Year 4, M =
Year 5, M =
Year 6, M =
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.
In the graph, MS represents the money supply and MD represents money demand. The vertical axis is the value of money
measured as 1/P and the horizontal axis is the quantity of money.
0.61
0.4
Money Supply
5000
MD₂
MD,
Chapter 15 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
Ch. 15.A - Prob. 15A.1CCCh. 15 - Prob. 1RQCh. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - Prob. 4RQCh. 15 - Prob. 5RQCh. 15 - Prob. 6RQCh. 15 - Prob. 7RQCh. 15 - Why, in the absence of public beliefs that the...Ch. 15 - Prob. 9RQ
Ch. 15 - Prob. 10RQCh. 15 - Prob. 1PCh. 15 - For the economy in Problem 1, suppose that...Ch. 15 - Prob. 3PCh. 15 - Prob. 4PCh. 15 - For each of the following, use an AD-AS diagram to...Ch. 15 - Prob. 6PCh. 15 - Suppose that a permanent increase in oil prices...Ch. 15 - An economy is initially in recession. Using the...Ch. 15 - Prob. 9PCh. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 15.1CCCh. 15 - Prob. 15.2CCCh. 15 - Prob. 15.3CCCh. 15 - Prob. 15.4CCCh. 15 - Prob. 15.5CCCh. 15 - Prob. 15.6CCCh. 15 - Prob. 15.7CCCh. 15 - Prob. 15.8CCCh. 15 - Prob. 15.9CCCh. 15 - Prob. 15.10CC
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- Q7) At T1, an economy is in long-run equilibrium at a real interest rate of 4%, a price level of 100, and with an expected inflation rate of 0%. If in T2 the actual price level is 95, then in that time period: A) r = 4%, i = 4% B) r= 9%, i -1% C) r= -1%, i 4% Dr= -1%, i 9% 1arrow_forwardConsider 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?arrow_forwardWhat Can the Fed Do about Inflation? In the article by Thomas Hogan, we learn that Russia's invasion of the Ukraine nor the shortage or supply chain issues has not derived the main causes of inflation. (Hogan, 2022) The main cause for the issues that we have been facing come directly from the constant price changes and the monetary policy that is currently in place. We learn that with Federal Open Market Committee (FOMC) has not adjusted their monetary policy, and have been raising the rates in such small increments that is causing the inflation to continue in an upward trend. What needs to occur is the FOMC needs to raise interest rates in greater scales in order the combat the inflation that is taking place and stabilize the price levels that are out there. (Hogan, 2022) What needs occur is that the Fed needs to come up with a policy that will allow for a predetermined path that slows down and regulating the money growth back to a safe place. Having the guidance from the article…arrow_forward
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