ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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- The effectiveness of
monetary policy in increasing or decreasing the growthGDP is at the heart of the debate as to the role of the Fed in fighting off recessions or spikes in inflation as we are experiencing now. It is your job to explain what the role of the central bank can have in stabilizing the economy and whether its policies in booms and recessions are symmetrical. Using both the Ap function as well as the IS-LM model, explain and illustrate with graphs under what conditions a central bank can do much and under what conditions a bank can do little to nothing to make spending and growth of real GDP rise or fall. Then, use the IS-LM model to illustrate and explain the expected move by the Fed at its next meeting in December to raise short-term interest rates by 50 basis points. Will the effect on GDP be small, large, or zero? Given what you have written do you conclude that the Fed’s policy is symmetrical, i.e., it works with the same efficiency slowing a booming economy as it does in stimulating a weak economy?
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- B. Consider the following model where the monetary policy will be the only policy variable affecting demand for output. For expositional purposes the income velocity of money is held constant. With these assumptions the aggregate demand for output can be written in logs as: mt + v = Pt+ Yt The above equation is the equation of exchange in logs (equation that addresses the relationship between money and price level, and between money and nominal GDP. The equation tells us that total spending (M x V) is equal to total sales revenue (P x Y)). To complete the model we need to add the aggregate supply equation and a money supply rule. yt = y'+ a(pt - Et-1pt1) (2) mt = Byt-1+Et (3) Given that agents form expectations rationally, find a solution for (i) yt and (ii) pt. Is there any scope in this model for the policy authorities to influence the output through systematic stabilisation policy? Explain your answer.arrow_forwardmultiple part question Create a graph of equilibrium in the IS-LM model. Show the effect of an expansionary monetary policy. Summarize your results. B. If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium? C. Starting from the equilibrium described in (B), suppose investors experience a decrease in “animal spirits.” What happens to output? Can the central bank offset this with expansionary monetary policy? D. What could fiscal authorities do to offset the shock to animal spirits described in (C)?arrow_forwardExplain and demonstrate graphically that if the central bank pursues targeting the interest rate, it is likely to lose control over a monetary aggregate. Include correctly labled diagrams.arrow_forward
- Suppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly 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_forwardRefer to the following figure to answer the following questions. Price level (P) P3 P2 P1 I " D C stay at Y2 A Y1 Y2 Y3 B Real GDP (Y) According to the figure, if an expansionary monetary policy is fully expected, that policy will cause an economy initially in full-employment equilibrium to see real gross domestic product (GDP) 4 first increase from Y₂ to Y3 but then decrease back to Y₂. increase from Y₂ to Y3. decrease from Y₂ to Y₁ increase from Y₁ to Y2.arrow_forwardWhat will be the effect of a decrease in money supply on the equilibrium real GDP and price level? To answer, draw the diagrams to illustrate the monetary transmission mechanism as the changes make their way through the models (money market) → (investment demand) → (Keynesian cross) → (AD-AS model), and describe the changes in wordsarrow_forward
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