policies such as Job Keeper and provision of subsidies to firms in order to reduce the severity of COVID 19 on the economy. Suppose the money supply expands such that the Reserve Bank predicts that the economic expansion is not sustainable. Use two diagrams one for the money market and another for the goods and services (Aggregate demand and Aggregate Supply model), to explain the policy that the Reserve Bank can adopt in order to overcome the effect of increasing money supply on the economy. Assume that: • money supply increased from the equilibrium of AUD 40 billion to AUD 70 billion · Interest was reduced to interest rate of 1.5% as part of the stimulus package for the nation to overcome the effects of COVID 19. But the equilibrium interest rate is 4% · Assume that equilibrium real GDP is AUD 60 billion Assume that inflation during COVID crisis was at equilibrium price of CPI 65 Assume that to overcome the inflationary crisis aggregate demand has to reduce by AUD 30 billion. Assume to restore the economy to equilibrium inflation has to be adjusted to CPI 120 · This is the completion of the tutorial

policies such as Job Keeper and provision of subsidies to firms in order to reduce the severity of COVID 19 on the economy. Suppose the money supply expands such that the Reserve Bank predicts that the economic expansion is not sustainable. Use two diagrams one for the money market and another for the goods and services (Aggregate demand and Aggregate Supply model), to explain the policy that the Reserve Bank can adopt in order to overcome the effect of increasing money supply on the economy. Assume that: • money supply increased from the equilibrium of AUD 40 billion to AUD 70 billion · Interest was reduced to interest rate of 1.5% as part of the stimulus package for the nation to overcome the effects of COVID 19. But the equilibrium interest rate is 4% · Assume that equilibrium real GDP is AUD 60 billion Assume that inflation during COVID crisis was at equilibrium price of CPI 65 Assume that to overcome the inflationary crisis aggregate demand has to reduce by AUD 30 billion. Assume to restore the economy to equilibrium inflation has to be adjusted to CPI 120 · This is the completion of the tutorial

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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According to the transmission mechanism of money,a. For constant output, if the real money supply exceeds the real quantity of money demanded, what will happen to the real interest rate that clears the asset market? (In describing the adjustment of the real interest rate, use the relationship that exists between the price of a non-monetary asset and the interest rate that it pays). Is money effective? (Does the change in nominal money supply cause real output to change?). Explain with details.
Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level decreases from 150 to 125. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. ? INTEREST RATE (Percent) 12 10 2 0 0 15 Money Supply Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supply
Suppose that, initially, the economy is operating in an inflationary gap and that the Federal Reserve (the Fed") pursues a contractionary monetary policy to close the gap. Assume that natural real GOP equals $2 trillion. The following graph shows the supply ($) and demand (D) curves in the money market. Adjust the graph to show the effect of the contractionary monetary policy. QUANTITY OF MONEY INTEREST RATE
The following table shows the quantity of money supplied and the quantity of money demanded for various interest rates. Interest Rate (Percent) Demand for Money (Billions of dollars) Supply of Money (Billions of dollars) 11 50 250 9 150 250 7 250 250 5 350 250 3 450 250 The following graph depicts the money supply curve in orange. On the graph, use the blue points (circle symbol) to graph the money demand, and the black point (plus symbol) to signify the initial equilibrium point in the market. Next, shift the money supply curve to show the affects of a $200 billion increase in the money supply. Then, plot the point corresponding to the new equilibrium point using the purple point (diamond symbol). 13 MS 12 11 10 INTEREST RATE (Percent) + 5 M 9 3 2 MS Money Demand Equilibrium Equilibrium,
Assume the money supply grows at a rate of / > 0 initially. At some later time, an immediate decrease in the rate of growth of money supply is announced. In other words, the money supply will grow at a lower rate p' < u. After that, a one-time increase in the money supply is announced. Mark ALL the CORRECT graphs. .
2
For the next two questions, consider an economy that has the following information: Its money supply is $2000, growing at a rate of 3 percent annually. The average dollar in this economy is spent 5 times per year. The price level is $2.5; inflation is 2 percent per year. We assume that velocity (income velocity of money) is constant. Calculate this economy's real output. Enter only numbers and a decimal point in your answer as needed. Round your answer to two decimal places as necessary.
Present an analysis where you examine the long term impact of an increase in the money supply. Use your analysis to explain why increases in the money supply may explain the observed changes in both product prices and nominal wage levels over time. Also, uses your analysis to explain (using words) what it means when macroeconomists say “money is neutral.”
Use the money market to explain the interest-rate effect and it's relation to the slope of the aggregate demand curve.
Exercise 1 cr+1 Consider the money supply Ms=mxB , m = cr+rr Assume that the demand for real money is given by the equation (M/P)d=0.25Y, and that the output has been growing 3% per year. Assume, further, that you have been called before Congress to testify about the long-run effects of increasing the growth of the money supply to 10 % per year. 1. State, compute and explain the long-run effects of this change on the inflation rate, on the nominal interest rate, on the real interest rate, on investment and on the real GDP. For each of them, argue both using the formulae that we studied and the macroeconomic dynamic beyond the effect. 2. Compute the implied money velocity. Suppose that the actual nominal value of the output (PY) is 1000, the value of the reserves is 50 and the toal value of the deposits is 75. Find the actual money multiplier. 3. State the different ways in which the central bank can achieve the change (+10%) in the money supply (think about the variables that can…
According to Keynes, which of the following information about the money market is wrong?A) The cost of giving up liquidity is interest.B) The money supply graph is steep.C) The equilibrium interest rate drops as a result of the expansive money supply.D) When the interest rate is above the equilibrium interest rate, a money supply surplus occurs in the economy.E) There is an inverse relationship between money demand and income.
Explain, and graphically illustrate, how a decrease in the supply of real money balances will affect equilibrium in the market for money. Derive the LM Curve by illustrating what happens in the market for money when there is a decrease in income. (See page 325 of your text for an example.) Using diagrams illustrating the market for money and the LM Curve, illustrate what happens when the supply of real money balances increases. (See page 326 of the textbook for an example.)